Switching to Interest Only Mortgage

An interest only mortgage can save a significant sum for households. But, at the same time, he can leave a headache for dealing with the capital repayment.

The basic idea of an interest only mortgage is that you just pay interest payments and rather than making capital payments you find another investment method for repaying the outstanding debt.

In reality, people often switch to an interest only mortgage to provide a short term reduction in mortgage payments. In times of recession and economic hardship, the attraction of making the switch to an interest only mortgage increases.

For example, if you have a 30 year £150,000 mortgage with an interest rate of 6%.

Your normal capital+interest repayments will be: £908

If you switch to interest only, the repayments will fall to: £750

Interest only mortgages could be seen as a convenient way to save money, if you were experiencing a year of financial hardship (e.g. if your partner left work to study for a year). They can also be useful if you are anticipating higher incomes / wealth in the future.

The problem is that once you get used to the lower monthly repayments it can hard to go back to the higher payments.

In the current climate, the temptation to choose an interest only mortgages might be higher. But, with falling house prices it can be more problematic. Falling house prices increase negative equity and with interest only mortgages the negative equity will be greater.

Some mortgage lenders offer an ability to switch between interest only and repayment mortgages (though this has probably become less common since credit crunch).

See also: Other ways to deal with sruggling to pay mortgages