Interest-only mortgages harsher than they seem

Posted: 15 Aug 2006 11:51:23 GMT

Research from moneyfacts.co.uk has revealed that although interest-only mortgages are becoming increasingly popular, often the consumer isn't prepared for the re-payment package coupled with the loan.

Interest-only mortgages have been a successful product for a number of years however; regulations governing repayment options have changed.

The study showed that in 1992 four out of five first-time buyers used the interest-only option alongside a repayment vehicle. But this figure has lowered with only one in 20 interest-only mortgages being accompanied by a repayment package in 2005.

Julia Harris, mortgage analyst at moneyfacts.co.uk, stated: "Many consumers may choose interest-only initially, with the intention to move to capital repayments in the near future, when their financial situation improves.

"But should they wish to keep the same repayment term, they need to be aware of just how much the costs will rise in the future."

For example, the study shows that an average £150,000 mortgage for a 25 year term charged at five per cent would carry a monthly interest repayment of £625, plus a capital re-payment vehicle of £251 making a total of £876.

However if a consumer waits ten years by making interest-only payments, they may come in for a serious shock when the repayment package kicks in.

The same average mortgage would see the interest payments (assuming the rate is unchanged) plus the repayment vehicle totalling £1,186 per month for the remaining 15 years.

This would result, over the projected 25 year period, in an increased payment of £25,680.

In relation to renting, experts still see interest-only repayment as the better option.

"By repaying interest only, you are not subject to landlord terms and are able to make improvements to the property," stated Ms Harris.

She added: "As long as you are fully aware that you may need to convert back to rented accommodation if the repayments become unaffordable."



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