Graduated payment mortgages (GPMs) are a type of mortgage plan designed for younger people who may not be earning high salaries but who are expecting that their earnings will increase over time. Graduated payment mortgages subsequently commence with low monthly payments that increase over an agreed term.
The Appeal of Graduated Payment Mortgages
GPM plans might then appeal to newly qualified professionals at the beginning of their careers where earnings are relatively low but the potential for greater earning power at a future point is high. As a result, graduated payment mortgages may appeal to medics, lawyers, IT professionals, accountants etc. at the start of their working lives as they make property purchase accessible where they would normally be impossible to afford.
How Graduated Payment Mortgages Work
Graduated payment mortgages normally have an amortization term of 15 or 30 years. After a specified period (most often between 5 and 15 years) the monthly payments rise for a number of consecutive years up to a fixed percentage. For example:
A young person taking out a graduated payment mortgage over a 30 year term may see the monthly payment rise by 6% each year (year on year) for 10 years. After the 10 year period the yearly increases stop but the mortgagee would then have to meet the increased payment amount for the remaining 20 years of the 30 year term. So after the initial 10 years of graduated payments the mortgage effectively becomes a conventional fixed payment mortgage.
The Pitfalls of Graduated Payment Mortgages
Graduated payment mortgages would seem to be an ideal mortgage for many people who are starting out on the property ladder or who are not presently earning at their expected potential. However, the perceived benefits of graduated payment mortgages may not materialize (or indeed could actually become a trap) if the borrower’s future anticipated earnings do not increase at a sufficient rate to keep in step with the rising graduated payments. If borrowers do not accurately predict what they will be earning in five years time, they may not be able to meet the monthly graduated payments. Also, graduated payment mortgages tend to be more expensive that conventional mortgages over time: although at first they may be affordable, the total outlay for graduated payment mortgages over the entire loan term can be significantly more expensive.
A Note About Graduated Payment Mortgage Loans
Any person considering a graduated payment mortgage should be sure that they fully understand the mechanics and implications of entering into such a loan agreement. It would be wise to discuss how well suited a graduated payment plan would be to your financial situation. Be sure to talk to a qualified independent professional before you sign up to any long term loan agreement.