Interest only Explained
Interest only mortgages - but you need a payment vehicle
Interest-only mortgages are popular ways of borrowing money to buy an
asset that is unlikely to depreciate much and which can be sold at the end of
the loan to repay the capital. For example, second homes, or properties bought
for letting to others. In the United Kingdom in the 1980s and 1990s a popular
way to buy a house was to combine an interest-only loan with an endowment
policy, the combination being known as an endowment mortgage. Homeowners were
told that the endowment policy would cover the mortgage and provide a lump sum
in addition. Many of these endowment policies were poorly managed and failed to
deliver the promised amounts, some of which did not even cover the cost of the
mortgage. This mis-selling, combined with the poor stock market performance of
the late 1990s, has resulted in endowment mortgages becoming unpopular. The
property boom from the late 1990s has seen house price inflation far outstrip
wage growth. This has led to many lenders introducing a 'pure interest only'
form of mortgage, one which needs no proof of a repayment vehicle. By August
2007, it was estimated that 29% of first time buyer loans were interest only
leading to calls for caution from the mortgage sector.
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