Warning for interest only mortgages
Dec 18, 2006
About 24% of new mortgages are taken out as interest only loans. With this type of mortgage borrowers only pay the interest on the loan each month. Lenders leave their customers to workout how they will repay the total amount in the future.
The Financial Services Authority (FSA) have looked at 857 interest only cases. 10% of these homebuyers admitted they did not know how they would repay the debt, or only had a vague plan in mind. In the opinion of the FSA another 5% did not have secure enough plans. Some were relying on selling the property to repay the loan, or changing to a repayment mortgage close to retirement. It is often the less well off who do not have definite plans. Around 20% would also have financial problems if the interest rate were to increase even 1% above the current 5%.
People often go down this route because they see it as the only way to get onto the housing ladder. However, the FSA is warning that homebuyers need to be realistic about their future circumstances, and lenders should take care when offering this type of mortgage.
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