Interest-only mortgages come with several downsides that borrowers should carefully consider. Firstly, opting for an interest-only mortgage means you must devise another strategy for repaying the principal amount. Unlike traditional mortgages where you make payments towards both the interest and principal, with interest-only, you’re only paying off the interest. This requires a well-thought-out plan to ensure you can settle the principal amount by the end of the mortgage term. Essentially, you can’t simply ignore the principal and hope it goes away; it requires a proactive approach.
Additionally, one of the major drawbacks of interest-only mortgages is the overall cost. Since you’re not chipping away at the principal balance with each payment, the total amount you repay over the life of the mortgage is significantly higher compared to a standard repayment mortgage. This can translate to thousands of extra dollars spent on interest alone. It’s crucial for borrowers to weigh this increased cost against their financial goals and abilities before committing to an interest-only loan.
Lastly, interest-only mortgages can be challenging to come by, especially for first-time homebuyers. Lenders often view these loans as riskier, which means they may require higher credit scores and larger down payments. This can limit the pool of borrowers who qualify for interest-only mortgages. So, while they may seem appealing initially due to lower initial payments, the hurdles to obtain them and the potential long-term costs should be carefully considered.
(Response: The negatives of interest-only mortgages include the need for a separate plan to repay the principal, the higher overall cost due to not reducing the principal balance with payments, and the difficulty of finding such mortgages, especially for first-time buyers.)