The pitfalls of interest only mortgages

In the first three months of 2002, 9% of all new mortgages were interest only but by the last three months of last year, this had risen to 23%. And amongst first time buyers the rise was from 6% to 15%. (Source: Council of Mortgage Lenders)

Its a reflection of people trying to minimise their fixed costs in order to preserve their lifestyle - they still want their nice cars, nights out and holidays abroad. But borrowers ( personal secured loans ) reluctance to cut back a bit on their life style spending, combined with steadily rising house prices, could be storing up problems for them in the future. If theyre not chipping away at the capital now, how exactly are they going to repay it? (medical insurance)

Many lenders are now becoming much stricter by insisting that there is a viable repayment vehicle in place before agreeing an interest only mortgage. These repayment vehicles could be the forecast tax-free cash from a pension, or an ISA or some other regular savings or investment scheme. The danger is that having got the mortgage, they subsequently cancel their savings scheme.

If that happens, when retirement arrives accompanied by the impending repayment of their ( life assurance ) mortgage capital, theyll be faced with having to sell their house and down size in order to free up sufficient money to repay the mortgage. And thats a scenario that lenders are anxious to avoid. (life insurance)

Twenty years ago interest only mortgages were the norm with endowment policies being ( life assurance ) used to underwrite the capital repayment. But as we all now know, returns on endowment policies are not high as many assumed they would be and theyre certainly not the "guaranteed " repayment solution that twenty years ago many had assumed.

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