How do Interest-Only Mortgages work...??

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podd

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I realise the advantage of an interest only mortgage is that the monthly repayments are lower than if the mortgagee has a repayment mortgage.

If someone borrows, for example, €200,000 over 25 years on an interest only mortgage, then over the 25 years they will only be paying the interest on the borrowed €200,000.

Therefore at the end of 25 years they will owe the lender €200,000.

How do people then repay this capital of €200,000?
 
Its an investor loan. Say you buy a property speculatively expecting some good cap appreciation in the next 5 years. You have tenants service the interest only payments thro rent and eventually you sell the place. Posket the cap appreciation and clear the capital. You are right you will never own it and it is not for home owners really.

You may also use it to toa buy and develop a site for example too, sell the build and clear the paymnet with sale proceeds.
 
I wonder why banks don't simply cut out the middle-man i.e. the investor.

Just buy the investment properties themselves, rent them to tenants and therefore the capital appreciation will go to their shareholders?
 
investor takes the risk. just because prices have historically gone up, does not mean that they will keep rising. If prices drop over the term of the mortgage, you still pay back the principal.
 
That's interesting as generally most people would tend to think that there is very little risk in investing in residential property.

For banks not to simply invest in the residential property themselves and rent it to tenants, then presumably the banks must think there is a much higher risk in doing this than most investors do...
 
I would think that the banks do invest in property, but they would only allow a certain percentage of their investment portfolio to be invested in this manner.
 
An endowment mortgage costs more than a pure interest only mortgage because you're also investing in the stock market.
Unlike an annuity mortgage, the principal component of the payments is invested. At the end of the mortgage term the investment is used to repay the mortgage. If the stock market underperforms you have to make up the shortfall. If it out performs you gain.

This type of mortgage is [broken link removed] because most endowment mortgages (in the UK/donno Irish figures) are below water.
 
podd said:
Do lenders also provide interest only mortgages to owner occupiers, or to investors only?
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No, you won't get long term interest only for owner occupiers; what some lenders will do is provide you with an initial period - say the first six months or year - of your mortgage on an interest only basis (the idea being that that will give you the time to recover from paying the large transaction fees, or to acquire furniture and appliances, etc.), and then annuitise the capital repayments over the remaining term.
 
Bank of Scotland offer interest only mortgages for the term of the loan for investors and home owners alike.

Interest only mortgages are widely available in the UK.

Sarah

www.rea.ie
 
Is that here in Ireland (not just the UK) that the Bank of Scotland offer interest only mortgages to owner occupiers for full term mortgages? For example, 25 year mortgages...
 
Becca said:
Is that here in Ireland (not just the UK) that the Bank of Scotland offer interest only mortgages to owner occupiers for full term mortgages? For example, 25 year mortgages...
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Yes but AFAIK up until age 65 only and not for a house you are having built.
 
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