Interest-only home loans 'could give buyers a shock'

A leading mortgage broker warned this week that a worrying number of borrowers are opting for interest-only mortgages in the hope that they will have enough equity in their houses to pay off the debt.

Peter Barrett, the head of MyMortgageDirect, said: "We are seeing increasing numbers of borrowers opting for interest-only deals: obviously the repayments are considerably less in the short term, but many buyers will be in for a shock many years down the road when the mortgage is due to be paid off. As the pattern appears to be being replicated with other brokers, there is a major problem building up for UK mortgage holders."

Inquiries made by MyMortgageDirect have uncovered a similar story being played out across Britain, as borrowers shun the widely discredited endowment mortgage and go for the option involving the lowest outgoings. Latest figures from the Council of Mortgage Lenders (CML) show an increase of a tenth in the number of borrowers taking out an interest-only mortgage. They now constitute a two million-strong mortgage book. And the CML figures on interest-only loans are restricted to first-time buyers.

Said Mr Barrett: "Banks and building societies will probably tell you that most mortgages are being written on a repayment basis, but brokers now have well over 50 per cent of the market and the situation is radically different from this side of the fence.

"When you consider how pension and other long-term savings plans have fallen off dramatically in the past few years, piling all your eggs into the one property basket seems like a big risk."