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Issue 57 - August 2007
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Interest only mortgages have grown in popularity over recent years. Here we examine the reasons why so many people are happy to simply pay the interest on their debt without making any inroads into the capital. Whilst these mortgages are a lifeline for many could they also be a timebomb waiting to explode?
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 According to recent statistics from The Council of Mortgage Lenders, interest only mortgages without a known repayment vehicle make up around a quarter of all new mortgages currently taken out. Perhaps this is not surprising when one considers the ever increasing cost of home ownership and the increasing multiples of income that first time buyers are resorting to just to get a foot on the ladder. |
However, fears are being raised that interest only mortgages are a potential time-bomb - many borrowers could come to the end of their mortgage term with the original debt still outstanding and no means for repayment.
Without a doubt, the average borrower's appetite for risk has grown over recent years, with many seemingly willing to take on more and more debt, both secured and unsecured. In addition, lenders seem to have an insatiable appetite for borrowers and seem prepared to take ever greater risk in the pursuit of targets and growth. Are the two together a recipe for disaster or a match made in heaven?
The attraction of an interest only mortgage to the hard pressed homebuyer is obvious - a mortgage of £150,000 at six per cent over 25 years costs around £978 per month on capital and interest. On interest only, however, the monthly payment is only £750. Or to put it another way, for the same monthly cost as a £150,000 capital and interest mortgage over 25 years you could borrow nearly £200,000 on an interest only basis. Perhaps we need to look no further for a reason for their growing popularity.
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