Interest-only loans only interest investors

One of the most important things to remember about mortgages is that they will only be as complicated as we make them.

One of the most important things to remember about mortgages is that they will only be as complicated as we make them.

When stripped down to their core, they are very straightforward animals - lenders advance some money to buy a property and the borrower repays the loan with interest over a set period. End of story.

Or maybe not, depending on how actively you decide to manage your loan.

A proactive approach to mortgages can make a real and positive difference to the cost of home-ownership if the right decisions are made.

READ MORE

The problem with decisions, of course, is that what might make sense for one person could spell disaster for another.

In this way, topping up mortgage repayments each month will usually be beneficial because this will reduce the term and, ultimately, the cost of the loan.

For those on a tight budget, however, overpayments can bring trouble, since they can place undue pressure on an already-strained situation.

In other words, overpayments will only be a good idea for those who can afford them.

Likewise, each of the various mortgage structures on offer in the market will all make sense for some people, but they will never all be good for everybody.

Take, for example, interest-only loans.

Most borrowers in the Republic will never even come across the concept, probably because their brokers or lenders just don't believe it would suit them.

And in many cases, the advisers will be right. In some others, however, interest-only loans could work better for borrowers than the more conventional annuity mortgages.

Put simply, interest-only mortgages work on the basis that the borrower's monthly repayments eat into the interest rather than the capital (the actual amount borrowed) on the loan. In this way, the repayments will be considerably smaller than they would be on an annuity mortgage, but the borrower must be prepared to pay off all of the capital in one lump at an agreed point in the future.

Mortgage broker, Peter Bastable of Simply Mortgages, says three lenders in the Republic currently offer this kind of product as a matter of course to owner-occupiers: IIB, Bank of Scotland and First Active.

Other lenders will, he says, consider interest-only requests from owner-occupiers only on a case-by-case basis.

All lenders will, on the other hand, offer the products to investors.

Mr Bastable says the "majority" of investors use this type of product to buy property, while only a small percentage of owner-occupiers do so.

Within this small percentage, according to Mr Bastable, customers are generally taking out large loans in the trading-up market.

"Generally speaking, anyone on a fixed income is not a suitable candidate for a long term interest-only product, as there is no obvious means of capital repayment in the future," explains Mr Bastable.

In this way, self-employed owner-occupiers might get more out of an interest-only loan than a standard PAYE worker.

Those who are interested in the products should be aware, as always, that terms and conditions apply.

Mr Bastable says IIB only offers interest-only for three years and mostly markets this to first-time buyers. The loan must, furthermore, be worth no more than 92 per cent of the property value.

Bank of Scotland reduces this loan-to-value ratio to 85 per cent, but offers interest-only mortgages for full terms.

First Active, meanwhile, offers its tracker rate on interest-only loans of up to 80 per cent loan-to-value for up to 10 years.

Úna McCaffrey

Úna McCaffrey

Úna McCaffrey is an Assistant Business Editor at The Irish Times