A recent article has suggested that struggling homeowners who are finding it difficult to make ends meet each month could benefit from opting for an interest only mortgage in order to reduce monthly repayments. It also suggests that those getting onto the property ladder for the first time could keep their monthly costs down to start with by opting for this type of mortgage over a repayment mortgage. However, consumers looking at interest only mortgages or any other types of mortgages for that matter need to ensure that they have all the facts before making any decision.

With a repayment mortgage the borrower makes a monthly repayment each months, and this repayment is divided between the actual loan and the interest on the loan. Over the term of the mortgage the balance continues to go down, and by the end of the mortgage term the loan and all interest has been paid off. However, with an interest only mortgage the monthly repayment is allocated to the interest on the loan only, and therefore the actual loan amount is still outstanding at the end of the mortgage term.

Whilst the repayments on an interest only mortgage can be considerably lower than with a repayment mortgage it is also important to consider other factors. Firstly, you need to ensure that at the end of the mortgage term you can afford to repay the actual loan balance, and the only way to do this is to set up some sort of sideline investment or savings and hope that it grows adequately to enable you to repay the actual loan balance at the end of the term. Therefore, although your monthly mortgage payment will be lower on an interest only mortgage than on a repayment mortgage you will also need to put money into the savings scheme or sideline investment that you arrange to raise the cash to pay the actual loan amount at the end of the mortgage term.

There are also a number of risks to consider. First of all, with house prices falling the level of equity in homes is falling. Recent reports suggest that many people with interest only mortgages have been relying on using the equity in their homes to repay the loan balance at the end of the term, but this is a risky game plan given that house prices are currently tumbling. One official said: “A previously booming property market led many people to bank on being able sell their home, use the proceeds to pay off the mortgage, and still have enough left to buy another home. However, this strategy may have been overturned by current and predicted future falls in property prices.”

Another thing to consider is that interest only mortgages are considered to be high risk, and in the current difficult financial climate many lenders may not entertain the idea of handing out these mortgages, so those looking to switch to or take out an interest only mortgage may actually find it very difficult to find a lender that will offer one at an affordable rate of interest.

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