Are you considering taking out a mortgage loan? Most first-time homebuyers opt for a loan with an annuity or a linear payback plan. Nowadays, more and more younger people choose to buy a home with an interest-only mortgage type.

What is an interest-only mortgage?

The main feature of interest-only mortgages is that you only pay the interest each month. If your mortgage interest rate is fixed, your monthly payments remain the same for the fixed term.

You do not repay any borrowed money until the end of the mortgage duration. This also means you do not accumulate equity in the home other than additional down payments that you make. You must repay the total mortgage sum in full when the mortgage term ends.

Currently, you can borrow up to 50% of the home's market value if you take out an interest-only mortgage. The interest-only mortgage has its benefits and risks. For example, if you want to stop renting and own property without high mortgage payments, a good alternative can be to apply for an interest-only mortgage; however, you do not build equity on a property.

Benefits of interest-only mortgage

Lower monthly payments

During the interest-only term, your monthly payments are lower in comparison to a linear or annuity mortgage.
Advantageous short-term solution

Interest-only loans are typically beneficial to those who aren't planning on staying in their home for a long time. This type of mortgage is most suitable for those with a solid financial position. If you already have savings pay back the mortgage balance if required.

Risks of interest-only mortgage

Sell property

When your interest-only mortgage reaches the end of term, you must repay the entire amount. You will have considerable debt if you do not have the funds to refund the total amount. If the housing market is not performing well after the sale, you may have insufficient funds to pay your debt.
Refinance interest-only mortgage

Your pension benefits can prevent you from obtaining a new or renewing an existing mortgage towards the end of your mortgage term.
Tax relief is limited

A mortgage interest deduction is limited to 30 years. The government does not want to promote interest-only mortgages, and they discourage you by not giving a tax rebate on interest-only mortgages. This could result in a significant increase in your monthly expenses.
Increased monthly payments

If your fixed-interest period has expired or you change mortgage providers, your monthly expense may increase or decrease as your mortgage rate changes.
The value of property decreased

If you choose to sell your property, the proceeds may be less than the amount owed on your mortgage, leaving you with negative equity. Making mortgage repayments during the maturity period can help mitigate this risk.
Retirement income

You may lose income when you retire, or your pension benefits may be lower than projected. Lower retirement income may make it difficult for you to pay your mortgage.