Interest-only mortgage risk to buyers

The figure for the number of first time buyers who take out interest-only mortgages and do not declare how they mean to repay them has more than doubled in the last 5years.

The interest-only mortgage has been popular since by just repaying the interest, borrowers can keep their monthly payments lower and more manageable. The downside to this, however, is that they are not actually paying off the capital on their loan. Some financial experts frown on this and view it as a possible headache further down the line, with the borrowers potentially facing huge debts and not actually owning assets.

A mortgage specialist at the brokers London & Country believes that anyone considering swapping from a repayment to interest-only type of mortgage should only do so as a last resort. In addition he recommends it also only be viewed on a very short term basis. He would view the opportunity of far reduced payments as breathing space for a few months. He concludes “If there is no repayment vehicle in place and the borrower has no plan of action they could ultimately find that the only way to repay the mortgage is by selling the property.”

Figures from the Council of Mortgage Lenders show that the number of first-time buyers with an interest-only mortgage who did not state how they planned to repay their mortgage has risen from 6%in 2002 to 20% in 2007. In 2002, 32,000 first-time buyers out of a total of 531,800 selected an interest-only mortgage and did not state their repayment method. This figure increased to 72,600 out of 357,500 first-time buyers in 2007.

Speaking on behalf of the Council of Mortgage Lenders, Sarah Robson said that interest-only mortgages were “a way of managing to cope” for borrowers under financial strain and the general feeling within the council was that they would become more popular if the financial crisis continued.

Independent mortgage broker Savills Private Finance do sympathise and realise that for some, an interest-only loan may be the ONLY way some homeowners can cope with monthly repayments, however they do agree that these costs are at a minimum on a short term basis and that you really must plan ahead financially (possibly with a savings plan or endowments) in order to avoid problems in the future.

The advice from mortgage advisers is that interest-only loans may work for disciplined borrowers but be aware that they would cost more over the term of the mortgage. Take the following example:-a £150,000 interest-only mortgage over 25 years at 5.75 per cent would cost £215,625 in interest with the original £150,000 still to be repaid. Monthly repayments would be £718. A £150,000 straight repayment mortgage would cost £133,098 in interest but the monthly repayments would be £943.