The End for Interest Only

by Mark Johnston

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

Recently the Bank of England maintained the startling base rate of 0.5 per cent.  This should come as no surprise to the readers of  With the struggling pound and the weak progress of the pound against other currencies, the Monetary Policy Committee has decreed that the base rate should not change.  This marks the 25th month running that the committee has decided against a change. 

What is a surprise is that the bank decided against increased quantitive easing.  There is some disagreement in the committee, with a small division requesting an increase to the base rate, citing continued impacts on inflation and pressures within this market.  Members of the monetary committee seem quite happy to wait and see what figures say regarding growth on Gross Domestic Produce (GDP).  Investors are betting the Bank will hold out on action until May or June but this is where the economic picture becomes a little clearer and where decisions need to be made and risks need to be taken. 

Inflation rose in February to 4.4 per cent and continues to rise, boosted by rising commodities prices.  Oil is also a contributing factor; the price is rising steadily driven by a higher demand within Asia and by supply concerns from the recent conflicts in the Middle East.  To keep inflation in check the Bank of England has the job of raising or lowering rates.

With current interest rates at 0.5 per cent, an average mortgage of £160,000 at a variable rate over 25 years, you would pay £568 per month.  If interest rates were raised to 2 per cent, then the same mortgage over the same period would cost £682 per month, over £100 more per month.

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,’

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