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Property Finance - Buy To Let Interest Only Mortgage
There are two different approaches to taking out a mortgage.
The first is to borrow on the same basis as any other loan, with a scheduled repayment structure that will pay off both the loan amount itself and the interest that it accrues. This way the amount of the outstanding loan will decrease over time, slowly at first but much more quickly as the end of the loan term approaches.
The second alternative is to take out an interest-only mortgage. As the name suggests, you pay only the interest on the sum you have borrowed. Optionally (or, with many lenders, perforce) you can take out a parallel investment for the term of your mortgage that - with luck - will pay off the capital sum and may even provide an extra lump sum.
The interest-only loan has taken a bit of a battering over recent years as it has emerged that many of the endowment mortgages that were popular in the 1980s and early 1990s were unlikely to meet their target of paying off the capital sum. However, the flexibility of this type of mortgage does provide some benefits - for example, it can be tied in with existing investment arrangements such as ISAs or a pension. And, provided regular reviews of your investment status are carried out to ensure that you will be able to make the capital repayment at the end of the term, it can be a reasonably safe option as well. Moreover, given that those who opt for an interest-only policy have higher risk tolerance than those who stick with the repayment option, it is possible that buy-to-let owners who are sure of the viability of their property may be less concerned about the risk of their investments falling short of the target. They may reason that since the property itself is generating income they may, given a certain amount of prudence, be able to provide themselves with a buffer against any shortfall. One aspect of the flexibility this type of mortgage offers is the ability to transfer the investment - be it an endowment policy, ISA/PEP or pension - from one property to another, minimising the administration necessary on switching between properties and sustaining a mature investment. However, anyone taking out an interest-only mortgage needs to be aware of the added element of risk involved if unforeseen circumstances should disrupt their plans.
