2. Interest only mortgage
This is a very new and slightly controversial mortgage. It is where the clients pay only the interest charges on the home loan for 20 years, and then have to repay the full capital amount at the end of the term.
This product is very common in more developed countries, and is particularly popular with young buyers and business owners. It should not be seen as a way of increasing a client's affordability when they are a low income worker.
The client will be paying the maximum amount of interest and will not be making any contributions to reducing the mortgage.
Clients need to have a specific reason for using the interest only mortgage:
To use as a facility (for wealthy individuals)
They expect their salaries to rise considerably in future (to pay off the mortgage).They are paying into an endowment fund
They will be renting the property and hoping that the Capital growth will be good.
Tips for the client
Overpayments & Underpayments. As the clients are only charged the interest on the mortgage, they can pay in lump sums to the mortgage and reduce their monthly interest charges.
Increase affordability. In certain circumstances this can be used to increase the clients affordability. This should only apply to graduates, or young professionals who are anticipating their income to rise significantly in the near future.
Buy to Let. This is a very tax efficient product for investors who purchase property to rent it out. This is due to interest repayments being �tax deductible' from the rental income on the property. Therefore the clients pay the minimum amount of tax on their properties.
Read about a fixed interest mortgage