Interest-Only Mortgage Confession
May 19th, 2006 1 Comment » | POSTED BY ROB
I have a confession to make: I am amongst the growing number of house-buyers taking out interest-only mortgages.
A few years ago (albeit before there was any prospect of me owning a property), I wouldn’t have touched interest-only mortgages with a proverbial barge-pole.
Having worked in the mortgage industry, I was well aware of the widescale problems encountered by people with these types of mortgage, particularly those who were victims of the endowment mis-selling of the 1980s.
When the possibility of buying our own home came up in the last few months, it still seemed as if the choice of mortgage type was a no-brainer – a repayment mortgage was the way to go.
But when we actually started looking at the costs, the reality was, as I suspect is the case for many first-time buyers, that the costs of taking out a repayment mortgage were simply too high – yet the lure of owning ones own home was simply too great.
The major reason I came round to the idea of going down the interest-only route was that it worked out we would only be paying a little bit more than we do currently in rent. But unlike with our rented property, hopefully we will see some of the benefits of a rise in houses prices (although we’ve probably missed the boat for seeing the huge price rises of the past). Although renting has served its purpose, it now feels like we’re paying out dead money. And the interest-only mortgage has given us our first tentative step on the property ladder.
Of course, we need to make sure we have some repayment method in place, and as I am already regularly contributing into an equity ISA, this will continue.
Ultimately, we know that a repayment mortgage is the best option in the long run. If you’re building up savings that are to pay off your mortgage, rather than paying it directly off the capital, then there’s always the temptation to dip into the savings from from time to time.
The hope is that in a couple of years time, when we should be earning more, we will switch the mortgage over to repayment. So please don’t be hard on those of us who find ourselves tempted by this much-maligned financial product!
1 Comment on “Interest-Only Mortgage Confession”
Hi,
We took out an interest-only mortgage around 5 years ago. The theory at the time was that we’d only be living there a maximum of 5 years anyway and a repayment mortgage would be spent mostly on interest anyway during the beginning years.
We’ve recently put our house on the market and have built up a nice pile of cash in an ISA to use as a deposit on our next purchase and/or for moving costs. It worked out okay for us.
Great site, by the way. It’s quite difficult to find uk-based personal finance blogs.
Arkad
