Disaster could lie ahead for those on interest only mortgages
All mortgages in the UK come under two main categories, which are repayment mortgages, also known as capital and interest mortgages, and interest only mortgages. With repayment mortgage the monthly repayment made by the borrower is applied to both the loan and the interest on the loan, which means that at the end of the mortgage term the mortgage should be paid off in full.
However, an interest only mortgage works in a slightly different way that makes it more of a high risk mortgage – to the point where many lenders will not consider an interest only mortgage. With these mortgages the monthly repayments made by the borrower are only applied to the interest on the loan, so at the end of the mortgage term the actual loan is still outstanding minus all interest.
Borrowers are meant to have a sideline investment running alongside the mortgage in order to enable them to pay off the balance, but not all borrowers do this – and even those that do risk insufficient growth in their investment to meet the amount needed to pay off the loan.
One of the main reasons why people choose interest only mortgages is that the monthly repayments are far lower than with repayment mortgages. However, one official said that those taking out or switching to an interest only mortgage could be setting themselves up for a fall in the future.
He said: ‘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.’
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