Interest Only Mortgages

According to the Council of Mortgage Lenders, 61,000 first-time buyers (and more than 200,000 homebuyers altogether) arranged an interest-only loan in 2005 without any repayment vehicle in place.

This guide looks at interest-only mortgages and:

Looks at the risks
Suggests repayment strategies

A growing problem:

Interest only mortgages appear (because you don't pay off your debt until the end of the mortgage term) much less costly than repayment mortgages For example, a £100,000 interest-only loan with an annual interest rate of 5% costs £416.67 a month, roughly £2000 pa. less than its repayment equivalent.

Of course, with the interest-only option you are still going to have to find the money to repay the principal at some point. But, an interest-only home loan that isn't backed by a plan to repay the amount you borrowed, as well as the interest is high-risk, because it relies on you making your own arrangements to repay the mortgage principal when the time comes.

Staying safe:

So, how do you ensure an interest-only mortgage does not become a financial millstone:

Make the mortgage longer:

By choosing the longest possible mortgage term you could reduce the monthly repayments you need to go the more secure repayment route. For example, a £100,000, 25-year, 5% repayment mortgage costs £585 a month. Over 35 years this becomes £505 a month. The down side however is that the eventual gross repayment is £36,500 extra for that reduction of just £80 a motn. Plus an extra 10 years until you own the property.

Change when you move:

Go for a repayment mortgage when you make your next house move.

Set up a monthly savings plan:

Many products allow you to make an overpayment to your mortgage - as much as 10% of the amount borrowed per year. The impact of not having that last Christmas holiday and instead paying even £1000 off on a 25 year deal will significantly add up.

Go 50/50:

If you can't afford a £100,000 repayment loan, why not look into a £50,000 repayment loan and a £50,000 interest-only loan?

Trade down:

If the worst comes to the worse, you can sell your home, pay off your loan, and use the remaining cash to buy somewhere less costly. We don't think that will be a very attractive prospect for many - but it could be what some are forced to do.

If you're struggling with your mortgage payments and want to know what your options are, why not take the ClearDebt Online Debt Analyser? Our short online form can analyse your financial situation and suggest what option is best for you.

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Download our guide to Interest Only Mortgages PDF