Finance Articles

When Is Interest Only A Good Mortgage Idea?

An interest only mortgage involves a repayment schedule where for a set period of time - usually five to 10 years - you only pay the interest. This means that you're making no dent in the original principal amount owing and this will have to be addressed further down the line but what it does mean is that you're making lower repayments for that initial period.

On first glance, this would appear to be storing up financial trouble for yourself in the years to come but let's look at some of the situations when an interest only mortgage might be the most effective way to finance buying a property.

If you have a heavily fluctuating income that is at a low ebb at the moment but is likely to go much higher at various points in the future then perhaps it would make sense for you to get into the property market now by utilizing the features of an interest only mortgage. This means that you can get into the market and buy your house now with the lower repayments for the first number of years and it would also allow you then to meet the higher repayments to start eating away at the principal amount when your income suits that higher mortgage repayment schedule at a later date.

For a lot of people paying off their mortgage debt is one of the most effective ways to build wealth but for other people who have different skills and see other opportunities then there is a possibility that the additional cash flow that would be freed up by having an interest only mortgage will be more effectively invested elsewhere. In this case, and interest only mortgage may be the best way to free up that additional cash to allow you to make those other investments that will ultimately grow your wealth more quickly than traveling the steady road of paying a larger amount toward your mortgage in the shorter-term.

When buying a house with the idea of selling it on again quickly at a profit, again, the interest only mortgage may be very useful. This would allow you to pay back the bulk of what you owe upon making a sale. If you require any additional cash in the shorter-term to allow you to fix up the house in such a way that would have allow the house to be more profitable when put back on the market this would also be a way to keep more of your cash to spend in this fashion and could turn out to be a very profitable use of an interest only mortgage scenario.

As you can see from the basic examples outlined, interest only mortgages can be very useful in a situation where you require the additional cash in the shorter-term and have already put a provision in place for how to deal with the larger repayments at a later date or if you intend to sell the house and pay back the money that way over a shorter period of time. The important caveat to remember here is that if you are simply using an interest only mortgage to finance a house that you probably can't afford and have not built in to your plan a way of being able to pay the larger repayments over the longer term then an interest only mortgage is probably not for you . It is very important not to be drawn into the idea of thinking you can afford a house that you really can't just because you can set yourself up with lower repayments in the short term.

Tom writes for Real Mortgage News. A site that provides clear information and calculators for all you mortgage needs.

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