Low Start and deferred interest
A mortgage with deferred interest explained.
In the early years, some of the interest due is not charged to the borrower, but
is instead added to the
capital.
This can be unattractive to people borrowing more than 90% loan to value,
especially in times of falling
house prices, as there is a greater danger of negative equity.
The deferred interest mortgage is attractive to those who want to maximise the loan and minimise the repayments in
the early years.
Borrowers must be relatively sure of having an increasing income.
Low start mortgage
Relatively popular in the early 1990’s when interest
rates hit a peak of 15.4%. They were designed to assist
the borrower to keep down costs in the early years,
often by deferring capital repayments during a
specified initial period. Designed to assist the borrower to keep down costs in the early years, often by
deferring capital
repayments during a specified initial period.
Borrowers must be aware that payments will increase later, and that no capital
will have been repaid at
that point.
- A low start mortgage involved a large reduction in the
interest rate in year one, gradually reducing over an
initial term so that the increase in interest rates was too
dramatic.
- Unpaid interest was added to the outstanding capital
balance
- A deferred mortgage differed in that the deferred
interest was the same amount for an initial set period.
The jump at the end of the deferred period was
dramatic.
- Attractive to those who want to maximise the loan and
minimise the repayments in the early years.
Government criticised over plan to help mortgage holders avoid
repossession
'The Government has been criticised after it admitting it does not know
how many people will benefit from its plan to help people defer mortgage
payments if they lose their jobs and fear repossession.' Telegraph 4/12/2008
Government to pay mortgage interest for two years if you lose your job
Telegraph 4/12/2008
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