Mortgages

Is an Interest-Only Mortgage a Good Idea?

Interest –only mortgages used to very popular, but these days they are very difficult to find. This is because there was a time when people took them out but made no provision to pay them off and therefore led the bank to repossess the house once the mortgage term was over as there was no money to pay it off with. There was also a problem with investments not growing as quickly as expected and therefore people who invested each month hoping to have enough money to pay off their mortgage once the term of the loan was up, actually did not have enough. This is why lenders are not so keen to offer this type of mortgage any more. However, it is possible to get some in some places, so it is worth thinking about whether it is the right option for you.

With an interest only mortgage you only pay the interest payments t the lender each month. You do agree, as part of your terms and conditions with them, that you will make other provision to make enough money during the term of the mortgage so that you will pay it off when it is due to be repaid. Most people invest money. An investment can be risky, but there are lots of different types with different risk levels. It is important to understand about the different types and the different levels of risk before you start to invest. Many people would pay a financial advisor to help them, as they could explain all about risk, types of investment and then show them the investments which best suit their needs.

An investment needs to be set up for the long term to offset all of the small fluctuations that happen in the markets. Therefore it can be a great thing to do to pay off a mortgage as the term of the loan tends to be between two and three decades. Paying in something each month means that you will accumulate a portfolio and by the time that you need the money, you should have as much as you need. It is wise though to keep a watch on it and make sure that you are sure that it will make enough money by the time you need to pay off the loan.
Compared with making repayments each month there are advantages and disadvantages. As you are not whittling away the debt, you will still owe the same amount of money at the end of the term as at the beginning. Some people like seeing the amount they owe going down over the term, but if this is not something that concerns you, then you will not need to consider this.

The investment that you are making could end up being worth more than the value of your loan. This means that when you have paid it off, you may also have some money left over which you could use for anything you wish. However, there is a risk that there will not be enough money to pay off the whole loan and then you will have to pay more in or find an alternative investment so that you know you will have enough.

Although you are contractually obliged to make an investment to pay off the mortgage, the lender will not need to see proof that you are doing it. This means that if you miss some payments in, due to financial difficulties or you just decide not to invest at all, they will not know. This might sound fine, but when it comes to paying off the mortgage and there is no money there, the home will have to be sold. You could sell it before the term is up and use the proceeds to pay off the mortgage. This sounds like a great plan, but it will leave you without anywhere to live and you may not make that much back as it all depends on your property increasing in value. This is a big risk and should not be done, but if you think that there is a risk that it may happen ith you, then it could be best to avoid this type of mortgage.

Loans

Is it wise to use Collateral for a Loan?

There are many different types of loans and some of them require you to put up something as collateral. This could be your home or your vehicle, for example. It means that if you have trouble repaying the loan over a significant period then the lender will repossess the item that you have put up as collateral. This could mean that you could lose your home or vehicle.

This can put you into a difficult situation. Not having anywhere to live or not having a means of transport, will put you in difficulty. It could be that you will not have enough money for a deposit to rent somewhere so you will have nowhere to live. It could be that you cannot get to work and therefore have to quit your job as there is no way of getting there without a car.

Of course, if we all avoided loans with collateral, none of us would have a mortgage and many people would not buy cars. Therefore avoiding these sorts of loans can be tricky. It can mean that we will not be able to better ourselves if we limit our borrowing like this. Usually borrowing for a home can really help us to improve our lives and finances as we can live rent free once we have one. It can save a lot of money in the long term and give us something to pass on to our children. A car can benefit us too, in different ways. It means that we can travel to specific destinations more easily, without having to rely on public transport. It may be the only way that we can get to work or visit certain relatives. It could be a great way to go out to places or on holiday. It could make a big positive difference in our lives.

Therefore it is a good idea not to panic about these sorts of loans. However, it is sensible to make sure that you fully understand what you are taking on. For example you need to make sure that you know what the repayments are on the loan and that you will be able to afford to pay them back. It is really important to know what the repayment amounts will be so that you can ensure that you will be able to afford them. Therefore before you take out the loan, find out the amount and look at how well you are managing your money each month. Work out whether you will be able to manage those payments or not. Often we can manage to start with, but if we lose our job, have some extra-large expenses or something like that we may find that we struggle to make the repayments. It can be tricky to predict whether something like this might happen and therefore it is hard to plan for. However, you can have insurance which will pay loan payments for you in some circumstances, so you might consider having that but you will have to make sure that you are covered for all situations. Some will only cover for illness, some for redundancy etc, so check the terms carefully.

An alternative way is to have some savings so that you can make the payments if you need to and do not have enough money for your salary. It is usually wise to save some money each month and this could be a good emergency fund for you. However, it might be better if you pay off some of the loan with that extra money. If you can do this, then this could save you a lot of money in interest. If the loan is flexible then you may be able to overpay and underpay which means that you could potentially put in some extra payments when you have spare money but when you do not, they will allow you to pay less. This will depend on whether you have a flexible loan or not and you will need to think about this when you organise your borrowing.

So as long as you are confident that you can make your repayments then using something as collateral on a loan should be fine and has many advantages. However, if you think that there is a risk that you might struggle with the repayments then it would be wise to avoid the loan if you can.