Being debt free, secured and unsecured, are goals for most people. Nobody wants the burden of debt, whether it be a mortgage for a house or a credit card. However, I recently met a friend, Stan, who was thrilled at having bought his first house at the tender age of 45. He had marital problems with debt and divorce earlier in life so he thought obtaining a mortgage would never happen for him.
He secured a £95,000 mortgage with a 5% deposit so the property cost £100,000. The problem was two-fold, the interest rate was high so he took the mortgage on interest only. With a mortgage on interest only I can only ever see problems ahead for Stan.
Interest Only Mortgages
The percentage for APR for Stan’s mortgage was 7% and he couldn’t afford the £650 interest plus capital repayment each month, so he decided to make the mortgage interest only. This cost him less money on a monthly basis at £550.
But, at 45 years old, even after 30 years of paying the mortgage Stan will have simply paid the interest without repaying the capital. The property will still need to be repaid!!
I couldn’t tell Stan – I didn’t want to be negative on his great news, he was on a high. However, I had to tell him eventually. I did it yesterday and the “penny dropped”, he realised he would struggle when he stopped working to pay the mortgage, but will still be outstanding.
The shock on Stan’s face was evidence enough the bank had not explained clearly how the mortgage would work. They didn’t explain that the property would never be repaid under an interest only deal and that after 30years the mortgage would still be there.
It’s a hard lesson to learn, but quiet simply, the banks and credit institutions are there to sell us products we may or may not need. They are not there to live our lives for us but instead make increased profits for their stakeholders. It’s not the banks fault, although they should have explained the situation clearer to Stan, because we all take responsibility for our own financial future and often make decisions led by the heart when the head should be leading.