Customers can choose to defer making capital repayments on their mortgage for the first two years of the loan term.
ICS Mortgages, one of the country’s non-bank lenders, has launched a new interest-only mortgage option for first-time buyers, movers and switchers.
It allows customers to defer having to make capital payments off their mortgage meaning their monthly mortgage repayment will be much lower for the first two years.
So how does it work and is it the right option for you?
How it works…
Firstly, to avail of the interest-only option you have to take out a five-year fixed rate with ICS. The option isn’t available with any of the lender’s other fixed or variable rates.
During the first two years, you’ll only pay the interest on your mortgage. This means your monthly payments will be much lower compared to a traditional mortgage where you pay off some of the capital and interest every month.
After your two-year interest-only period is up, your mortgage will revert to capital and interest payments, which means your monthly repayment will increase as you’ll now be paying off both the capital and the interest.
As an example, if you borrowed €250,000 over 30 years at a rate of 4.25%, you’d pay €1,229 a month on a "normal" capital and interest mortgage.
But if you choose the two-year interest-only feature, your mortgage repayment for the first two years will be only €885 a month. Then at the start of year three, your mortgage will transition to a capital and interest mortgage and your repayment will increase to €1,273 a month.
What rates does ICS Mortgages offer?
ICS offers the choice of a three or five-year fixed rate as well as a variable rate. It doesn't offer any longer-term fixed rates.
The fixed rate you get depends on the size of your deposit or the loan-to-value (LTV) ratio.
For example, if you have a 10% deposit, you can get a three-year rate of 4.20% or a five-year rate of 4.40%. But if you have a 40% deposit, you can get a three-year rate of just 3.85% and a five-year rate of 4.25%.
But for now, the interest-only option is only available on ICS’s five-year fixed rate.
|
LTV |
3-year fixed rates* |
5-year fixed rates* |
Variable rates** |
|
60% |
3.85% |
4.25% |
4.50% |
|
70% |
4.10% |
4.25% |
4.50% |
|
80% |
4.20% |
4.40% |
4.50% |
|
90% |
4.20% |
4.40% |
4.50% |
*From 12th May
**From 1 June
Is this mortgage suitable for me?
The first few years after moving into a new home can be tough financially.
If you were previously renting, you’ll have to get used to paying for things like property tax, mortgage protection insurance, and maybe management fees. And unless you're lucky enough to move into a brand new, A-rated home, you’ll invariably need to fork out big money on some home improvements, new heating, a paint job, or fixing up the garden.
And let’s not talk about all the new furniture expenses...
So having the choice of paying a smaller mortgage for the first year or two may feel like a godsend to many.
But the key thing to remember with an interest-only mortgage is that you’ll pay more in interest over the lifetime of the mortgage.
Continuing with our example above, if you were to borrow €250,000 over 30 years on a normal capital and interest mortgage, you’d pay back €223,547 in interest over the life of the mortgage (this presumes you choose a five-year fixed rate of 4.25% and then roll over onto a variable rate of 4.99% for the remaining 25 years).
But if you choose the interest-only feature for the first two years, you'd pay back €231,409 in interest, or almost €8,000 more, over the life of the mortgage.
There’s also the fear that you’ll get too used to paying a smaller mortgage and then struggle to revert to a capital and interest mortgage after the two years are up. You need to use the "savings" over the first few years wisely.
There’s also a risk you could fall into negative equity, as after the first two years are up, you'll still owe the exact same amount to your bank. You won’t have paid anything off your original loan amount. This could cause issues if you want to move home or sell the property. So get good advice and think carefully about whether an interest-only option is right for you.
And that’s where we can help!
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