From what I understand about mortgages, which isn’t a lot at all, I just don’t see any scenario where an interest only mortgage is a good idea.
You pay it off for let’s say 20 years and you still have the full balance remaining. What am I missing?
In: Economics
Just to add to the other answers it’s worth noting that if you have *any* investment vehicle available where the return will be greater than the rate of the mortgage you would be better off repaying the principal of the mortgage at the end of the term.
So if your mortgage rate is ~2-3% and a simple index fund averages 8% you’ll have more money after 25 years if you take out an interest only mortgage and put a bit of money into the index fund instead. At the end of the term you take enough out of the index fund to repay your mortgage principal and you’ll have some money left over even if you paid the equivalent amount in total to a repayment mortgage.
The issue of course is risk so this isn’t usually a good idea for residential mortgages. Not sure how it is in other countries but in the UK we have a bit of a looming crisis from self-certified interest only mortgages where the terms are coming up to expiry with no repayment vehicles, or repayment vehicles that failed horribly.
People are suddenly finding themselves hitting retirement with a lender asking for an appreciable fraction of their property value, especially in areas where said values haven’t increased as much.
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