The Different Types Of
Mortgages
WHAT IS AN INTEREST-ONLY MORTGAGE?:
The concept of an interest only mortgage is that as the name implies,
you only pay the interest for the amount of money you owe the lender
over the 'term' (think mortgage lifespan).At the end of the term,you
must have the amount you originally borrowed in the beginning ready
& waiting in cash.This method is designed for the tighter
budget spectrum of borrowers but carries a higher element of risk.For
starters you have much less equity (ownership) in the property over the
life of the mortgage - typically only the amount you put down for the
initial deposit.So if you put down a 25% advance at the beginning of
your mortgage you only really own 25% of the property.If the market
price of the property started to slump due to a recession the biggest
risk is that you would suffer from negative equity and have a house you
will have to sell at a loss and still have to find someway to cover the
shortfall.The worst case
scenario is if that the lender could reposess the property,sell
it in an attempt to make back its money (which it is perfectly
legally allowed to do) and if the sale price still didnt amount to the
price of the mortgage you borrowed plus interest.That means
you wouldnt have your deposit returned but would instead still be
required to pay money.The
risk posed to lenders offset slightly by slighter higher initial
deposit and the fact that over the term of the mortgage loan a borrower
will have paid significantly more - way more in fact in interest
than if it was a standard capital & interest mortgage.This fact
can be easily demonstrated on
http://www.guardian.co.uk/money/mortgage-calculator.
