2012: Safe House – Espinosa
One of your largest financial outlays is probably going to be your mortgage. Good financial planning will ensure that this is repaid efficiently and as sensibly as possible. For all the jargon (and there is a lot) there are really only two types of mortgage. A repayment mortgage (you repay the mortgage over the life of the mortgage – typically 25 years). An interest only mortgage (you simply pay the interest charged on a mortgage and at the end of the mortgage must come up with the money to clear the original mortgage (which won’t have decreased unless you have paid part of it off already). Not rocket science, though the way that the mortgage world works with 101 variables of these two versions, you could be forgiven for thinking it wasn’t really as simple as all that – but it is.
As a financial planner, an interest only mortgage can be a good way for clients to run their mortgage. It is not for everyone. It involves risk – that you might not have enough to pay back the loan. Historically this is an area of financial advice that has come with all sorts of problems – remember endowments? this was really just a long-term savings plan to build up money to pay off an interest-only mortgage, nothing more. Sadly most were, technical word, “rubbish” and didn’t or won’t clear the original target. However this doesn’t mean that interest only mortgages are bad. They certainly are more risky and when its your home, frankly few would want to risk a home.
Lenders have been gradually altering the terms under which they will now offer an interest-only mortgage, as directed by the FSA they have come to the conclusion that a repayment mortgage is better. I agree with this, but there are still reasons for some to use an interest-only mortgage. It is a little bit silly to assume one size fits all. Anyhow, Skipton has followed a number of other lenders by increasing the equity/deposit element of a mortgage for interest-only mortgages. Skipton now want a minimum of  a 40% equity/deposit, Nationwide want 50% as does Coventry. Santander and NatWest are fairly keen to have larger deposit/equity stakes too. So what? well not much of an impact really unless you are using an interest-only mortgage and want to move to another lender. At Solomon’s we don’t arrange mortgages, so we refer clients to expert mortgage brokers. The most important element of a mortgage is that it is properly planned, that it is affordable and appropriate provision is made should life not work out as planned – you don’t want to be left holding a larger IOU to a lender without any resources to pay. As ever caveat emptor!
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