by Mark Johnston
Will switching your mortgage deal to an interest only deal save you money or will it put you and your finances in serious trouble and possibly lead to repossessions.
We recently commented that a staggering number of homeowners, about 3.5 million, are unaware of what the increase or decrease in the base rate would have on their mortgage repayments. That’s a massive one in five that wouldn’t know what their repayments would actually be if the base rate were to go up. Of the 22 per cent of the mortgage market, 13 per cent are on tracker mortgages and 16 per cent are on the lending variable rate. Since 2007, over 250,000 homeowners have gone onto interest only payments for their mortgages due to their home financial situation or due to arrears. This process only repays interest and nothing on the capital actually borrowed. This is fine for a short period but is risky but as Ray Boulger mortgage expert at John Charcol says ‘Homeowners should be working towards getting back to capital repayment. The mortgage debt still has to be paid off.’
Lenders have now tightened the criteria for interest only loans making it more difficult for borrowers to remotgage. Boulger goes on to say that ‘Borrowers who want to take their existing interest-only loan with them when moving house, either because they have a lifetime tracker or because they want to avoid big redemption penalties, for example, are increasingly being refused by their lender.”
One prominent and respected commentator on this topic warned that those choosing to switch their mortgages over onto an interest only platform are arguably no better off than if they were just renting a property but were additionally burdened with the trouble and responsibilities of homeownership on top with few of the rewards.
An American economist by the name of DeAnne Julius disagreed and suggested that interest only repayments on mortgages can “make sense for certain people at certain times in their lives”. I would tend to agree. As prices rise, debt will shrink and it becomes some what easier to repay lump sums further down the track.
The FSA released a report recently indicating that the number of interest only borrowers rose to more than 369,000 between 2007 and 2010. The reason sighted for this rise was mainly due to customers wishing to switch onto a lower and more affordable monthly repayment plan to avoid defaulting or the possibility of repossessions. This, is as Julius put it does make sense for those in that situation.
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