Sleepwalking into a crisis: borrowers lulled by cheap deals

Soaring numbers of borrowers taking out cheap interest-only home loans are in danger of storing up expensive long-term problems, brokers have warned.

For many people on a tight budget, the offer of low monthly repayments is too tempting to turn down - particularly if they are first-time buyers who are having to contend with rising property prices.

New figures from the Council of Mortgage Lenders show that more than 200,000 homebuyers took out an interest-only loan in 2005 - up from 143,700 in 2004 and 123,900 in 2003. Of these, 60,900 were first-time buyers, and none had a recorded repayment vehicle in place for the mortgage itself.

But this option is risky, as borrowers chip away only at the interest owed. To repay the property's capital value, they will usually need to set up a separate savings or investment vehicle, such as an individual savings account (ISA). Failing this, they need to be very confident that they will be in a strong enough financial position later to clear the debt.

But this confidence is often misplaced, brokers warn. Too many buyers are either assuming that higher salaries will enable them to switch to a repayment mortgage (clearing both the interest and capital), or counting on rising property prices so they can sell up years later and release the equity in their home.

In the past, when selling endowment mortgages, lenders at least required confirmation that a separate policy was in place to pay off the loan eventually. This is no longer the case. Today the lender has no legal responsibility with regard to a savings plan; it is up to the borrower.

"You could find that 10 years into the term, people suddenly realise they have made no provision and have to repay a 25-year mortgage in 15 years," warns Nick Gardner of broker Chase de Vere Mortgage Management. "This would mean a potentially unaffordable rise in repayments."

But, he adds, it's easy to see the appeal of these deals. "On a £100,000 mortgage at 5 per cent, say, capital and interest repayments would be £591.27. On an interest-only basis, the repayments fall to just £416.67."

One problem is that borrowers start out with the best intentions and then fail to see them through. "People nowadays are very bad at adjusting their lifestyles," says Mark Chilton at broker Purely Mortgages. "They insist they will switch to repayment when they can afford to, but there is no real trigger forcing them to do so."

However, interest-only can work as long as the borrower is disciplined. "There is a time and a place for it," says Rob Clifford of broker Mortgageforce. "It's a valuable facility in terms of bridging the affordability gap and perfectly appropriate for many" - particularly those who can be sure of salary increases or who have put down a deposit of least 10 per cent.

The key is to ensure you move to a repayment deal as soon as you can afford it, and before the low monthly outgoings get too comfortable. "An interest-only mortgage is a two- to five-year arrangement," says Mr Clifford.

David and Antonietta Lunn, from Mitcham in Surrey, remortgaged from a repayment loan to a £200,000 interest-only flexible mortgage with Nationwide building society. This is a two-year fixed-rate deal at an interest rate of 4.55 per cent and, importantly for the couple, it allows overpayments of up to £500 each month.

"This is helping us to reduce our capital more quickly," says David. "Our monthly mortgage commitments have gone down but we are now in control of how much we pay back each month because we can make overpayments if we want to."

Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Guru Careers: Pricing Analyst

    £30 - 35k: Guru Careers: We are seeking a Pricing Analyst to join a leading e-...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £45K YR1: SThree: At SThree, we like to be dif...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + competitive: SThree: Did you know? SThree is a mul...

    Guru Careers: C# Project Team Lead

    £55 - 65k (DOE): Guru Careers: A unique opportunity for a permanent C# Develop...

    Day In a Page

    Blundering Tony Blair quits as Middle East peace envoy – only Israel will miss him

    Blundering Blair quits as Middle East peace envoy – only Israel will miss him

    For Arabs – and for Britons who lost their loved ones in his shambolic war in Iraq – his appointment was an insult, says Robert Fisk
    Fifa corruption arrests: All hail the Feds for riding to football's rescue

    Fifa corruption arrests

    All hail the Feds for riding to football's rescue, says Ian Herbert
    Isis in Syria: The Kurdish enclave still resisting the tyranny of President Assad and militant fighters

    The Kurdish enclave still resisting the tyranny of Assad and Isis

    In Syrian Kurdish cantons along the Turkish border, the progressive aims of the 2011 uprising are being enacted despite the war. Patrick Cockburn returns to Amuda
    How I survived Cambodia's Killing Fields: Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape the US

    How I survived Cambodia's Killing Fields

    Acclaimed surgeon SreyRam Kuy celebrates her mother's determination to escape to the US
    Stephen Mangan interview: From posh buffoon to pregnant dad, the actor has quite a range

    How Stephen Mangan got his range

    Posh buffoon, hapless writer, pregnant dad - Mangan is certainly a versatile actor
    The ZX Spectrum has been crowd-funded back into play - with some 21st-century tweaks

    The ZX Spectrum is back

    The ZX Spectrum was the original - and for some players, still the best. David Crookes meets the fans who've kept the games' flames lit
    Grace of Monaco film panned: even the screenwriter pours scorn on biopic starring Nicole Kidman

    Even the screenwriter pours scorn on Grace of Monaco biopic

    The critics had a field day after last year's premiere, but the savaging goes on
    Menstrual Hygiene Day: The strange ideas people used to believe about periods

    Menstrual Hygiene Day: The strange ideas people once had about periods

    If one was missed, vomiting blood was seen as a viable alternative
    The best work perks: From free travel cards to making dreams come true (really)

    The quirks of work perks

    From free travel cards to making dreams come true (really)
    Is bridge the latest twee pastime to get hip?

    Is bridge becoming hip?

    The number of young players has trebled in the past year. Gillian Orr discovers if this old game has new tricks
    Long author-lists on research papers are threatening the academic work system

    The rise of 'hyperauthorship'

    Now that academic papers are written by thousands (yes, thousands) of contributors, it's getting hard to tell workers from shirkers
    The rise of Lego Clubs: How toys are helping children struggling with social interaction to build better relationships

    The rise of Lego Clubs

    How toys are helping children struggling with social interaction to build better relationships
    5 best running glasses

    On your marks: 5 best running glasses

    Whether you’re pounding pavements, parks or hill passes, keep your eyes protected in all weathers
    Joe Root: 'Ben Stokes gives everything – he’s rubbing off on us all'

    'Ben Stokes gives everything – he’s rubbing off on us all'

    Joe Root says the England dressing room is a happy place again – and Stokes is the catalyst
    Raif Badawi: Wife pleads for fresh EU help as Saudi blogger's health worsens

    Please save my husband

    As the health of blogger Raif Badawi worsens in prison, his wife urges EU governments to put pressure on the Saudi Arabian royal family to allow her husband to join his family in Canada