80/20 Option

The 80/20 option or 80 20 interest only loan is a way to get around the rules that require mortgage insurance on certain types of loan. The mortgage lender is looking for security which is what he is offering the money against. If your deposit on the property is less than 20% of the full price (i.e. your mortgage will be more than 80% of the value) then there is less security than they might feel comfortable with, so they ask for mortgage payment insurance. Indeed, this is now a legal requirement. Unfortunately, such insurance can be expensive.

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The point of the 80/20 option is to get around this restriction and save the expense of the mortgage insurance. Instead of taking a mortgage for 100 % of the value, take one for 80% and a second (or secondary mortgage, as it is called) for the other 20%. Other variations are also possible, like an 80/10/10 (where the primary mortgage is 80%, the secondary 10% and the deposit 10%) or 80 20 refinance. This avoids the need to take out mortgage insurance and may well save money.

However, whether it does in fact save money depends upon the full terms of the 80/20 option. The secondary mortgage will usually be at a higher interest rate and for a shorter term than the primary one. This can, depending upon the full terms, mean higher payments in the very early years and much lower ones (without the insurance) in the later years. The 80/20 option can definitely save money: whether the specific offer to you will or not is best discussed with your adviser.