For those that need to move due to job changes and those that have seen their family grow and need to move to a larger property this could create serious problems.

Reports from the UK’s financial regulator, the Financial Services Authority, have suggested that around four in every ten households have interest only mortgages, where their repayments are applied only to the interest on the mortgage loan, which means that at the end of the mortgage term the borrower still owes the full amount of the mortgage loan minus the interest.

Many people opted for these loans because the repayments are significantly lower than with a capital and interest mortgage.

However, many of those taking out interest only loans had been relying in increases in property values to repay the balance at the end of the loan tern, and with property prices having plunged over the past couple of years millions have been left facing negative equity, which leaves them tied to their property and unable to move, possibly for many years.

It is thought that over four millions homeowners may have to stay put because of this problem.

One economist stated: ‘With prices having fallen as much as they have already many homeowners will find that they simply won’t be able to move home. Any equity they did have has gone because of the fall in property prices. And having made no effort to repay their mortgage they may find lenders are reluctant to lend to them again. They are going to have to wait until house prices climb back to the levels they were in 2007. We believe that could take many years.’

Many middle class households may suffer due to interest only mortgages is a post from: Glitec Loans

Higher payments may cause some problems to their monthly budget as they try to accommodate the higher rate of interest reflected in the payments and as a result they may start to have problems making the payment, causing them to fall behind. Missing one or more payments puts the mortgage account into arrears, which can have serious consequences, such as repossession by the lender.

If you find it harder and harder to keep your mortgage payments current, there are a few things you can do to avoid going into mortgage arrears:

Switch mortgage lenders -  Shop around among the many mortgage lenders to find the most competitive deal for your needs. Many lenders have low interest mortgage loans and easy repayment terms that may be better than your current loan. Once you find such a deal you do have to move quickly because many lenders have a set time period in which you can switch your mortgage.

A mortgage for £180,000 at the APR of 7.94% carries a monthly payment of £1394. However, if you switch to a lender offering a lower rate, such as 5.99%, you can shave about £226 off your payment each month. In order to take advantage of such a deal, you do need to have a perfect credit rating and missing even one payment in the past year would exclude you from such a deal.

According to Vivienne Starkley of Equal Partners in London, “If you are struggling with your finances you should always make your mortgage a priority and get on to a low rate fast. Getting a bad payment record limits your options.“

Switch to an interest only mortgage. Many lenders will permit you to switch your mortgage loan from one on which you make payments on the balance and the interest to one on which you pay only the interest that has accrued in the month on the outstanding balance.

By taking such a step, it will take a lot longer to repay your mortgage, but it will give your finances a bit of a reprieve when you need to have extra money. You can save hundreds of pounds each month that will enable you to keep your mortgage up to date and still have the option of paying more than the interest when you can afford it so that you do bring down the outstanding balance by a small amount.

One of the benefits of taking this step is that you do not have to switch lenders and there are no fees associated with the switch, which can take place in the middle of a term. However, you do have to realize that you can’t continue in this manner forever and that you will have to take steps to repay the outstanding balance after you have your finances straightened out.

Extension of the term. You can gain some financial relief by extending the term of your mortgage so that your loan is spread out over several more years. This will lower your monthly payment allowing you to avoid arrears on the mortgage. The average mortgage is set up so that it is repaid in full over the course of 25 years.

There are lenders who offer longer terms and by taking this step you can decreased your monthly payments and still pay an amount on the outstanding balance each month. Even extending the term by five years will save you about £85 per month.

There may be a nominal charge for making this change to your loan agreement, but you can make the change at any time. The disadvantage is that it will take you longer to become mortgage free.

Take a look at mortgage insurance. If you are worried that you may lose your job or become too ill to work, you can consider the possibility of taking out mortgage protection insurance. This insurance will make your monthly payments for you in the event that one of these things happen to you. However, there is a lot of controversy surrounding such insurance policies in that the premiums may be quite high and the payments on your mortgage are usually for a two-year period or less.

Keeping Your Mortgage Payments Up to Date is a post from: Glitec Loans

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.

Can an interest only mortgage ease your finances? is a post from: Glitec Loans

Most industry experts had predicted that the next base rate cut would come in May, following the December and February interest rate cuts recently. However, King’s indication that the rates could be cut sooner have now changed these predictions.

One economist stated: ‘We now expect the Bank of England to trim interest rates by a further 25 basis points to 5% in April rather than in May as we had previously forecast. Further out, we expect interest rates to fall to 4.5% by the end of the year and to 4% in the first half of 2009.’

Mr King has, however, warned that consumers should not expect the same sort of radical action that has been taken in the United States. He said that whilst an earlier rate cut may be on the cards, the Bank of England did not intend to slash rates in the same way as the US Federal Reserve, which has slashed interest rates by 3% over the past six months, taking the base rate from 5.25% to 2.25%.

Howard Archer from Global Insight said that the situations in the United States and England were very different, hence the decision by the Bank of England not to slash rates in this way. He said: ‘This is not an economy that has ground to a halt.’

Recent additions:

• Huge drop in range of mortgage deals available
• Disaster could lie ahead for those on interest only mortgages
• Charity concerns over sale and rent back firms
• A five year fix could work out cheaper than a two year one

Interest rate cut becomes more likely due to tighter lending conditions is a post from: Glitec Loans

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.’

Recent additions:

• A five year fix could work out cheaper than a two year one
• Take fast action to get a good mortgage deal
• Mortgage fraud levels up to £700 million a year
• Avoid knocking the value of your home down further

Disaster could lie ahead for those on interest only mortgages is a post from: Glitec Loans

What’s out there?

To start with, what sort of mortgage hunter are you and what are you looking for? If you are one of a group intending to take out a joint mortgage then your choices will be limited, but you will be able to find a lender and you will be able to find one that will allow a mortgage to be held in joint names by up to four people. The amount of such a mortgage will be calculated on three times the highest salary plus one times each of the other’s incomes. In today’s market you had better hope that at least one of you has got a really well paid job!

Repayment or interest only

Fundamentally there are two main types of mortgage: they are either repayment, where you pay back the interest and the capital lump sum that you borrowed each month or interest only, where you just pay back the interest and use a policy such as a life assurance policy or another investment fund product to pay off the loan at the end of the mortgage term.

Circles within circles

Within these broad principles there are a whole host of options. It is the proliferation of these options, sometimes called different things by different lenders, that gives the impression there are a confusing number of types of mortgage.

Which of these options is best for you depends on your attitude to risk and on how much spare cash you have each month as well as whether you want to aim to pay off your mortgage early or not.

Standard variable rate

If you like your life to be varied then this one is for you. The monthly repayments will change periodically roughly in line with the changes by the Bank of England in the Base Rate of borrowing. Each lender will have a different standard variable rate of interest, so shop around.

Capped

A capped mortgage is one where the interest rate on the monthly repayments cannot exceed a certain amount, so if the Base Rate climbs you will be protected from the higher end of the rate by the ceiling on the product. This is a good mortgage to choose if you are working to a budget on your monthly finances. The capped period usually is only for a few years, maybe between 1 and 5, after which it will either revert to the standard variable rate for that product or it will change to a different capped rate.

If you have been paying much under the base rate while in the capped period, in other words your repayments have been at their maximum for some time then you might find when that period ends that you face quite a hefty increase in repayments.

You also need to be aware of any tie-in penalties and how long this tie-in period lasts once the capped period has ended. Many products have these penalties which are designed to stop you transferring to another product as soon as you have finished the offer period.

Flexible

Flexible mortgages will allow you to pay off more than the required repayments each month without penalty and will also allow you to under pay if you need to and will have the facility for payment holidays. Most will also calculate interest on a daily basis. Some of these flexible mortgages are also off-set mortgages which will provide you with a bank account so the mortgage becomes like a huge overdraft that you gradually pay off over the loan period.

Fixed rate

And finally fixed rate mortgages are for those of you who like to know exactly what’s going on in your life. These will enable you to accurately budget your monthly finances as the rate won’t change for the fixed period. However, as with the capped mortgage you need to be aware of any penalty payments that might be applied once the fixed period is over.

There are other types of mortgage out there and with such a variety to choose from it will only be a matter of time before you find exactly what you are looking for.

More Information:

• FSA mortgage information – free impartial advice on mortgages from the FSA

Choosing The Right Mortgage is a post from: Glitec Loans