press release

INTEREST ONLY mortgages could present a ticking time bomb for many – but financial data comparison site Moneynet.co.uk suggests it is possible to defuse it if lenders introduce a regular review – at least every three years - with borrowers who lack any repayment provision.

Non repayment mortgages now make up around a quarter1 of all new mortgages, and with lenders continuing to do whatever it takes to reel in growing numbers of customers, it’s clear that many borrowers willing to take on more debt could be heading towards financial meltdown.

“Borrowers’ attraction to interest only mortgages isn’t hard to work out – a repayment mortgage of £150,000 at six per cent over 25 years will cost around £978 a month. On interest only, however, they won’t have to dig so deep as monthly cost falls to just £750, leaving enough to afford the extras that everybody wants,” says Moneynet.co.uk chief executive Richard Brown.

Funding for new cars, expensive holidays and the latest gadgets has to come from somewhere and worrying about repaying a mortgage due in 25 years is simply not on the radar for many spenders.

“Although interest only mortgages play a vital part in the mortgage industry, often providing the only means for first time buyers to hold the key to their own front door, misusing this type of loan is counter-productive,” says Brown.

“In the longer term, it is crucial that borrowers ensure they clear their mortgage debt prior to retirement to avert financial disaster in old age,” he added.

Brown believes that having a regular dialogue with lenders could save many borrowers from severe financial difficulty in the future and even repossession.

“Lenders should review their interest only clients’ situation at least every three years to work out if they are at risk and, if so, look for a more secure strategy,” he says.

Over the years, circumstances change so a regular review – not just a once-yearly glance at a mortgage statement - could be extremely beneficial to borrowers who may be able to afford a repayment mortgage at a later date.

“A sharp prod from their lender could be the wake-up call needed for those who are simply using interest only mortgages as a cheap form of income supplement and will hopefully open their eyes to the fact that relying on the prospect of an inheritance or the continuing rise in house prices might not be the best answer to paying off a mortgage in 25 years,” adds Brown.

Source: Council of Mortgage Lenders, July 2007

* BBA/BSA data, April 2007