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."

Seth Rollins cashes in his Money in the Bank contract to win the WWE World Heavyweight Championship
WWERollins win the WWE World Heavyweight title in one of the greatest WrestleMania's ever seen
Arts and Entertainment
Louis Theroux: By Reason of Insanity takes him behind the bars again
tvBy Reason of Insanity, TV review
Arts and Entertainment
Cassetteboy's latest video is called Emperor's New Clothes rap
videoThe political parody genius duo strike again with new video
Arts and Entertainment
tvPoldark, TV review
Finacial products from our partners
Property search
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Recruitment Genius: Retirement Coordinator - Financial Services

    Negotiable: Recruitment Genius: To provide a prompt, friendly and efficient se...

    Recruitment Genius: Annuities / Pensions Administrator

    Negotiable: Recruitment Genius: You will be the first point of contact for all...

    Ashdown Group: HR, Payroll & Benefits Officer - Altrincham - up to £24,000.

    £18000 - £24000 per annum + benefits: Ashdown Group: HR, Payroll & Benefits Of...

    Ashdown Group: Learning and Development Programme Manager

    £35000 - £38000 per annum + benefits : Ashdown Group: A highly successful, int...

    Day In a Page

    No postcode? No vote

    Floating voters

    How living on a houseboat meant I didn't officially 'exist'
    Louis Theroux's affable Englishman routine begins to wear thin

    By Reason of Insanity

    Louis Theroux's affable Englishman routine begins to wear thin
    Power dressing is back – but no shoulderpads!

    Power dressing is back

    But banish all thoughts of Eighties shoulderpads
    Spanish stone-age cave paintings 'under threat' after being re-opened to the public

    Spanish stone-age cave paintings in Altamira 'under threat'

    Caves were re-opened to the public
    'I was the bookies’ favourite to be first to leave the Cabinet'

    Vince Cable interview

    'I was the bookies’ favourite to be first to leave the Cabinet'
    Election 2015: How many of the Government's coalition agreement promises have been kept?

    Promises, promises

    But how many coalition agreement pledges have been kept?
    The Gaza fisherman who built his own reef - and was shot dead there by an Israeli gunboat

    The death of a Gaza fisherman

    He built his own reef, and was fatally shot there by an Israeli gunboat
    Saudi Arabia's airstrikes in Yemen are fuelling the Gulf's fire

    Saudi airstrikes are fuelling the Gulf's fire

    Arab intervention in Yemen risks entrenching Sunni-Shia divide and handing a victory to Isis, says Patrick Cockburn
    Zayn Malik's departure from One Direction shows the perils of fame in the age of social media

    The only direction Zayn could go

    We wince at the anguish of One Direction's fans, but Malik's departure shows the perils of fame in the age of social media
    Young Magician of the Year 2015: Meet the schoolgirl from Newcastle who has her heart set on being the competition's first female winner

    Spells like teen spirit

    A 16-year-old from Newcastle has set her heart on being the first female to win Young Magician of the Year. Jonathan Owen meets her
    Jonathan Anderson: If fashion is a cycle, this young man knows just how to ride it

    If fashion is a cycle, this young man knows just how to ride it

    British designer Jonathan Anderson is putting his stamp on venerable house Loewe
    Number plates scheme could provide a licence to offend in the land of the free

    Licence to offend in the land of the free

    Cash-strapped states have hit on a way of making money out of drivers that may be in collision with the First Amendment, says Rupert Cornwell
    From farm to fork: Meet the Cornish fishermen, vegetable-growers and butchers causing a stir in London's top restaurants

    From farm to fork in Cornwall

    One man is bringing together Cornwall's most accomplished growers, fishermen and butchers with London's best chefs to put the finest, freshest produce on the plates of some of the country’s best restaurants
    Robert Parker interview: The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes

    Robert Parker interview

    The world's top wine critic on tasting 10,000 bottles a year, absurd drinking notes and New World wannabes
    Don't believe the stereotype - or should you?

    Don't believe the stereotype - or should you?

    We exaggerate regional traits and turn them into jokes - and those on the receiving end are in on it too, says DJ Taylor