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Popularity of interest only mortgages rises

According to latest figures the number of people deciding to take out an interest only mortgage rather than a repayment, or capital and interest, mortgage has soared, with rising property prices and rising interest rates forcing many to opt for an interest only deal due to affordability issues.

Despite the popularity of this time of mortgage in the current financial climate, one in five lenders will still not offer this type of mortgage loan, classing it as a high risk loan that is not stable enough to be considered.

The latest figures come from the Council of Mortgage Lenders, and shows that twenty five percent of borrowers have an interest only mortgage, and twenty percent of first time buyers are opting to take out an interest only mortgage.

With an interest only mortgage the repayments each month are much lower, because the borrower only repays the interest on the loan each month, so at the end of the mortgage term to principle loan amount still remains. For this reasons, borrowers are expected to invest in another financial product to run alongside the mortgage, enabling them to pay off the loan at the end of the term.

According to figures, a borrower taking out an interest only mortgage on a loan of £100,000 could save over £160 per month on repayments compared to someone on a repayment mortgage. Although the savings are impressive, the downside is that the borrower has to have another sound investment that will enable them to repay the balance of the loan at the end of the term, and this can be a risk.

One broker from London and Country stated: 'Borrowers see interest- only as a cheaper route but it's not true. If you never pay off the loan, it will cost you more over the life of the mortgage because you continue to pay interest on the whole amount throughout the term.'

Tom Smith
25th April 2007


More Information:

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  • The True Cost Of Your Mortgage
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