Problems may lie ahead for interest only homeowners

An industry official has recently warned that homeowners with an interest only mortgage may face a very uncertain and problematic future, as many of them do not have the ability to repay the principle mortgage loan balance at the end of the mortgage term.

Whilst many lenders now refuse to offer interest only mortgage due to the higher risks involved, these mortgage have been popular in the past because the monthly repayments are much lower.

This is because the borrower only has to pay the interest off over the mortgage term, but this means that at the end of the term the actual mortgage loan is still outstanding.

Borrowers are supposed to invest in another product to run alongside their mortgage so that they can try and raise the money needed to repay the principal loan at the end of the term. Some fail to do this and others do invest but their investment does not come up to scratch.

The industry official stated: ‘It is tempting to switch from repayment to interest-only. But, unless borrowers have plans in place to eventually repay their loan, they may be simply storing up problems for the future. Getting to the end of the mortgage term and still owning the initial debt would be disastrous.’