Interest Only Mortgages: A Fuse Waiting to be Lit

Interest Only Mortgages: A Fuse Waiting to be Lit

Many of us dream to get on the property ladder, since the dawn of land, man, and women, have wanted to be land owners.

For some innate reason, we want to have our own place, piece of land, a property to call our own.

However, property is not cheap. The old joke as to why property is so expensive goes, “because they are not making any more of it”.

But there is truth in jest.

Buying property is not cheap, and usually involves saving for a deposit, getting a mortgage, and then affording the mortgage.

Banks and mortgage lenders know and feel our pain, that is why they try to come up with new mortgage products to allow us to be able to buy and afford a house/property.

If we feel saving for a deposit is too difficult, based on our earnings and cost of living, mortgage lenders and banks think of ways for us to buy a property and get a mortgage, with a low or no deposit.

If bad credit is holding us back from getting a mortgage, then the mortgage lenders create some bad credit loan to help those with low credit scores get a loan.

If affordability is the problem, then the mortgage lenders will try to find a way to reduce the monthly payments, so they can be more affordable.

The only way to reduce monthly payments, except reducing the amount borrowed, is by reducing the interest charged, and/or increasing the term.

Increasing the term is a good idea, take a loan out for 15 years instead of 10 years, and the payments go down.

Take out a loan for 20 years and the payments go down even further. However, as a borrower, the longer the term, even with a low interest rate, the more you pay in interest, because you are paying so long on the loan.

Then the lenders got together and came up with a brilliant idea of interest only mortgages. Just pay the interest on the loan for a period of time. The property is expected to appreciate, grow in value, and then after a set period, you can remortgage to a new loan, maybe one with a fixed rate, or tracker rate.

In theory, it all sounds so good. On paper, it seemed to work. In reality, it may be the fuse to the “debt time bomb” we have been hearing about.

Interest Only But Only For a Period of Time

There is a lot in the news, and growing concern over interest only mortgages, and if and when they may blow.

As the Bank of England debates interest rate changes, and increases, as a home owner with an interest only mortgage, you should be concerned.

If rates go up, so could your mortgage payment.

If properties don’t appreciate or go up, many home owners see no reason to continue making payments, and walk away from their property.

The dream has been shattered and turned into a nightmare.

The fact is that if you have an interest only mortgage, yes it helps you get into the property and afford the payments. But this interest only period is only for a short while, maybe five (5) years.

After that time you are expected to sell the property to pay off the loan, you keeping any profits, or remortgaging to a new loan to keep the property.

Sounds easy. Remember, it looked good on paper.

The reality is much harsher.

It is believed that there are 1.67 million people in the UK with interest only mortgages. This represents over 17.5% of all mortgages in the UK.

If these start to fail and fall, it is not just a bomb, but a nuclear blast!

The FCA/Financial Conduct Authority’s Jonathan Davidson said, “Since 2013 good progress has been made in reducing the number of people with interest-only mortgages.”

“However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.”

“We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons.”

‘We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take.

For many people, this is a very real possibility, and they need to act now, and speak to their mortgage lender to inquire what options may be available.

Unfortunately in some instances, the cure comes too late. If enough properties are repossessed or lost through interest only mortgages and poor appreciation, then the banks and lenders may be forced to acknowledge the problem.

But only after the fuse has been lit.

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Every lender on our website has their own specific criteria by the basics are mentioned below and you must have a guarantor to be eligible. Simply select the lender of your choice and you will be taken directly to their website where you can apply. You will be required to submit your details including:<li style=”text-align: center;” data-mce-style=”text-align: center;”>Name (must be over 18 as the borrow, 21 or 25 as the guarantor)</li><br /><li style=”text-align: center;” data-mce-style=”text-align: center;”>Residence (your chances will improve if your guarantor is a homeowner)</li><br /><li style=”text-align: center;” data-mce-style=”text-align: center;”>Employment status (must be employed or on a pension)</li><br /><li style=”text-align: center;” data-mce-style=”text-align: center;”>Income (earning at least £600 per month and able to make repayments)</li><br /><li style=”text-align: center;” data-mce-style=”text-align: center;”>Monthly expenses (not have too many loans open or in major debt)</li>
You will then be asked to include the details of your guarantor and as mentioned above, this is usually someone who you know and trust and wants to help you with your personal finances. Ideally, a guarantor with good credit will maximise your chances of being approved based on the idea of ‘if someone with good credit trusts you, well we can too.'<strong>How Much Can I Borrow From Guarantor Loans?</strong>Guarantor Loans gives applicants the chance to borrow £500 to £15,000 depending on the lender. Some lenders we feature like Buddy Loans only have a maximum loan value of £7,500 and TFS Loans is the only lender that stretches up to £15,000.Factors that can influence the amount you can borrow revolve around having a good guarantor. One that is a homeowner, with solid employment, income and good credit rating will maximise your chances of borrowing the largest drawdown possible.The lenders featured on Guarantor Loans see a homeowner as someone who has already gone through the rigorous process of credit checking and affordability and if they can afford a house, they should be able to act as a guarantor for you.By comparison, having a guarantor that is not a homeowner offers slightly less security and means that amount you can borrow is slightly less too.Higher amounts may be available to those who already have a better than average credit rating, are homeowners themselves and a repeat customer with the lender who has already paid their loan on time. To apply directly with your lender of choice see <a href=”” data-mce-href=””>direct lenders</a>.<strong>What Does The Guarantor Have To Do?</strong>Upon completing an application, the lender will typically send you a <a href=”” data-mce-href=””>pre-contract loan agreement</a> and SECCI (Standard European Consumer Credit Information form) which will highlight the terms of your loan. You and your guarantor will be required to review the terms of the loan, including the loan drawdown, fees, repayment dates and responsibilities – and this can be signed via an online verification process using your email and mobile phone.The lender will usually carry out an individual phone call with you and your guarantor to ensure that you both understand the responsibilities and what is required of you – notably that if you cannot make repayment, your guarantor will be required to pay on your behalf. Further to some additional credit and affordability checks, funds can typically be transferred within 24 to 48 hours (or sometimes on the same day).<strong>Are Guarantor Loans Available For Bad Credit Customers?</strong>Yes, even if you have a history of adverse credit, <a href=”” data-mce-href=””>CCJs</a>, bankruptcy or IVAs several years ago, you can still be eligible. The idea is that you are using your guarantor and their financial history to ‘back you up’ and give your loan extra security. However, it is noted that your guarantor should have a good credit score and consent to co-signing your loan agreement.<strong>How Soon Can I Receive Funds?</strong>Guarantor Loans works with lenders that can facilitate funds within 24 to 48 hours of approval, or sometimes on the same day.When your funds are successfully transferred, most lenders working with Guarantor Loans will send the full amount to the guarantor’s debit account first. This is a standard security measure carried out by lenders to ensure that the funds are going to the right person and confirms the involvement of the guarantor. The guarantor usually has a ‘two week cooling off period’ where they can decide to pass on the money to the main borrower or they can change their mind and return the funds with no extra charges.