D. Mortgages with deferred interest (1).pdf
Transcript
Term: 01. Mortgages with deferred interest Mortgages with deferred interest With deferred interest (deferred payment) mortgage, the provider charges interest on the full loan but allows payment of only part of this for a specified period Therefore, the amount of capital owed increases and after the...
Term: 01. Mortgages with deferred interest Mortgages with deferred interest With deferred interest (deferred payment) mortgage, the provider charges interest on the full loan but allows payment of only part of this for a specified period Therefore, the amount of capital owed increases and after the specified period of time the borrower will start to make payments on the increased amount A combination of more conservative lender attitudes to lending (since the 2008 financial crisis) and tighter MCOB rules have meant the availability of deferred interest mortgages has declined An existing borrower may still have this type of this mortgage Before the FCA tightened the rules on affordability assessment, these schemes often had a higher income multiplier due to enhanced affordability in early years Borrower will require a larger deposit than a standard mortgage, as the lender tends to offer a loan to a maximum of for example 90% of the value, giving a margin for the capital owed to increase in the early years and avoid potential negative equity When the deferred period ends monthly payments will increase significantly so future affordability is a big consideration The lender will insist on a sum assured on the endowment (term assurance if pension or ISA used to fund mortgage repayment) of up to 125% of the initial loan The borrower would need to anticipate an increasing income to afford the increasing payments in the future MCOB rules regarding affordability make it very difficult for lenders to offer deferred interest mortgages Due to the effect that the deferral period can have on the repayments that are required and unpredictability of future household cash flows Recommended Reading: Investopedia – Deferred Interest Mortgage
