Time being called on Interest Only?

There has been much hype recently regarding Interest Only and Repayment mortgages. With an Interest Only mortgage, you only pay interest and no capital and so, at the end of your chosen term, you still owe the lender the same amount as when you began. Normally with this method, it is recommended that you contribute to a saving or investment vehicle to generate funds to repay the mortgage at the end of the term. However, this is usually optional.

With a Repayment Mortgage, you pay both interest and capital each month. Initially, this appears more expensive, but does mean that you pay back the loan with no debt outstanding at the end of the term assuming you meet the required payments on time.

Many lenders have recently tightened their requirements on Interest Only mortgages. Some will not allow this method above certain loan to value levels. Others charge higher interest rates and many are trying to persuade customers to switch from interest only to repayment.

Why the recent attention to these repayment options? Simply, because many borrowers have stepped onto the property ladder choose the cheaper option promising to review their payment plans at a later date. The problem is that the ‘later date’ never seems to arrive! As we all know, people generally live to their means. Many borrowers on this scheme have no savings or viable plans to pay back the debt and this is worrying!

That said, Interest Only mortgages can be right for certain professions - people entitled to annual bonuses: the fluctuating income of self employed: or employments where lump sums are received after a number of years in service.

This debate is gathering pace so expect to read more in coming months.

Finally, do you know the full details of your own mortgage? A recent Consumer Financial Education Body report suggests that 15% of mortgage holders are unaware of their current repayment style or interest rate! As this is the largest debt you are likely to take, it seems crazy not to understand it! We are quick to change mobile, broadband or utility provider the minute rates start to increase. This mentality should also be applied to mortgages. Always be on top of your mortgage. Otherwise it could cost you a small fortune.