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."

PROMOTED VIDEO
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

    Selby Jennings: Oil Operations

    Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

    The Jenrick Group: Night Shift Operations Manager

    £43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

    SThree: Trainee Recruitment Consultant - LONDON

    £20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

    SThree: Trainee Recruitment Consultant

    £20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

    Day In a Page

    Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

    'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

    Yazidi girls killing themselves to escape rape and imprisonment
    Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

    Ed Balls interview

    'If I think about the deficit when I'm playing the piano, it all goes wrong'
    He's behind you, dude!

    US stars in UK panto

    From David Hasselhoff to Jerry Hall
    Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

    Grace Dent's Christmas Quiz

    What are you – a festive curmudgeon or top of the tree?
    Nasa planning to build cloud cities in airships above Venus

    Nasa planning to build cloud cities in airships above Venus

    Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
    Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

    Clocks, rifles, swords, frogmen’s uniforms

    Surrounded by high-rise flats is a little house filled with Lebanon’s history
    Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

    Four months after the bombardment, Gaza’s wounds are yet to heal

    Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
    Gastric surgery: Is it really the answer to the UK's obesity epidemic?

    Is gastric surgery really the answer to the UK's obesity epidemic?

    Critics argue that it’s crazy to operate on healthy people just to stop them eating
    Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

    Homeless Veterans appeal: Christmas charity auction

    Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
    Pantomime rings the changes to welcome autistic theatre-goers

    Autism-friendly theatre

    Pantomime leads the pack in quest to welcome all
    The week Hollywood got scared and had to grow up a bit

    The week Hollywood got scared and had to grow up a bit

    Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

    Panto dames: before and after

    From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
    Thirties murder mystery novel is surprise runaway Christmas hit

    Thirties murder mystery novel is surprise runaway Christmas hit

    Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
    Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

    Anne-Marie Huby: 'Charities deserve the best'

    Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
    The botanist who hunts for giant trees at Kew Gardens

    The man who hunts giants

    A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there