Five questions on... interest-only mortgages


Do lenders still offer interest-only loans?

Some do, but they're getting fewer and fewer with the Co-operative Bank pulling its deals from next Tuesday while others have made it harder for borrowers to qualify by demanding much higher deposits.

What's the problem with them?

With an interest-only loan, a borrower repays none of the capital – the original amount they borrowed. Instead, the mortgage repayments only cover interest charges.

So what? Haven't most people got plenty of equity in their home?

Not anymore. Many people who took out interest-only loans in the last decade as a cheap way to get on the housing market, have seen the value of their property subsequently fall. Those that have paid none of the capital back could be in the position now of owing more than they borrowed with no way of repaying the cash. In other words they could be trapped in their existing home. Even those who don't plan to move could be facing a mortgage time bomb when the loan term is up. They may be forced to sell the home to repay the outstanding loan.

So why aren't they outlawed altogether and what should people do?

They are perfectly fine if a borrower knows how they will repay the capital once the mortgage term ends. For instance, anyone expecting a huge bonus, legacy or other cash lump sum may feel confident of covering the debt. If they haven't got that, borrowers should look to switch to a repayment loan as soon as possible.

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