When assisting clients with home loan options, having an in-depth understanding of the rules and requirements is essential as a mortgage broker. If a client shows interest in applying for an interest-only mortgages, they should be informed of the various elements of the loan before applying.
What is an Interest-Only Mortgage?
Interest-only mortgages are a type of home loan that allow a borrower to only pay mortgage repayments for the loan’s interest amount. This type of home loan allows borrowers to pay less in monthly mortgage repayments for a set period of time.
Interest-only mortgages are a great option for first-time home buyers who cannot afford full monthly mortgage repayments, borrowers struggling to manage their debt repayments, and borrowers interested in paying decreased monthly mortgage repayments.
What Happens When an Interest-Only MortgagesEnds?
When an interest-only mortgages ends, the home loan will revert back into a principal and interest loan. However, there are additional options a borrower can explore before the interest-only time period ends, including the following options:
- Refinancing for a new interest-only loan with a new mortgage broker
- Speaking with their current mortgage broker about extending the interest-only mortgages period
- Permitting the interest-only loan to revert to a principal and interest loan to begin paying off the principal amount
Disadvantages of an Interest-Only Mortgages
- Borrower can potentially end up paying a significant amount of interest over the life of the loan due to its high interest rates
- Equity can be difficult to accumulate with interest-only home loans
- The cost of monthly mortgage repayments will increase significantly when the interest-only period has finished