If you want to buy a house but know that paying a mortgage will put a big dent in your budget, you might want to consider an interest-only mortgage. If you don't know what an interest-only mortgage is or how it can help you, this article will give you some good advice on how to get one.
What is a loan that only pays the interest?
With an interest-only mortgage, you only pay back the interest on the loan. You don't pay back any of the capital debt. When the mortgage term is over, you'll pay off the capital payment in full.
How do you get the money back?
Even though you don't directly pay back the capital when you pay your mortgage each month, you do pay for it. You pay for the capital with a lump sum or an investment fund. So, instead of making monthly mortgage payments to pay back the capital on your mortgage, you could put those payments into an investment fund. Besides investment funds, the main other ways to pay off capital are:
- A lump sum from something like an inheritance
- Savings
- Changing to a mortgage with a monthly payment
Why would you want to do this?
Even though you still put money into an investment fund every month, these payments are likely to be a lot less than what you would pay on a normal mortgage. Your monthly payments for an interest-only mortgage will be low, so it might be a good idea if you can't pay a lot each month right now. Also, the idea is that the money you put into the investment fund will grow and give you enough money to pay off the capital and some extra money at the end of the mortgage term.
Is there danger?
There are, of course, some risks that could happen if you get an interest-only mortgage. The first problem is that if you switch to a repayment mortgage later to pay off the capital, you will pay back a lot more money than if you had started with a repayment mortgage. Even though it may be hard for you right now, you might be better off getting a mortgage that you can pay back. But with interest-only mortgages, the biggest risk is that the investment fund you set up won't be enough to pay back the capital at the end of the mortgage term. If you can't pay back the capital, you could lose your home at a time when it will hurt you the most, like when you're ready to retire.
If you want to get an interest-only mortgage, make sure that the way you plan to pay for it is safe and that you have backup plans in case the money isn't enough to pay back the capital. Getting an interest-only mortgage can be a great way to keep your payments low while you work to make more money.
