Written by Harvey Jones    Thursday, 29 July 2010 14:35    PDF Print E-mail
Interest-only mortgages becoming even pricier
Bank managers were only too keen to sell interest only mortgages in the late 90s, so what’s changed? Bank managers were only too keen to sell interest only mortgages in the late 90s, so what’s changed?
Life is getting tougher for many homeowners with interest-only mortgages, with Lloyds and Halifax now making them pay a 0.2% premium over borrowers with capital repayment mortgages.
This reflects growing fear among lenders that many people are using interest-only mortgages to slash their monthly mortgage repayments, without setting up a proper repayment vehicle to ultimately clear the capital.
Interest-only mortgages were hugely popular in the late 1990s, when most borrowers took out endowment plans to clear the capital and hopefully leave a fat surplus. The subsequent mis-selling scandal, when underperforming endowments left millions of borrowers with a shortfall on their mortgage, put a stop to that.
An estimated one in five borrowers still have interest-only deals, but lenders are getting tough by demanding proof that they have a suitable plan to repay the debt. Relying on an expected windfall or inheritance is no longer enough.
Andrew Montlake, director at mortgage broker Coreco, says if you don’t have a plan for repaying your capital, now is the time to take action. “You should start making a dent in your capital balance, either by switching to a repayment mortgage, or simply overpaying when you can.”
Current low interest rates are a good opportunity to knock thousands off your loan amount. “If you can remortgage to a cheaper deal, you might find you can switch to a capital repayment mortgage at minimal extra cost.”
If you decide to keep your interest-only mortgage you should also save regularly into a tax-efficient investment vehicle, such as an Isa. “Alternatively, take out an offset mortgage and pay your savings into that. This reduces the size of your debt and your monthly interest payments, but you can borrow the money back if you need it later,” Montlake says.
Ray Boulger, senior technical manager at mortgage brokers John Charcol, says most mortgages allow you to overpay by 10% a year or £500 a month. “This means you can have an interest-only mortgage and still repay some capital when you have money to spare. But whatever you do, you need to make sure you have some method of paying off your capital at some point before you retire.”
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