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Interest-only mortgage take-up doubles
The number of interest-only mortgages being taken out has doubled over the last four years, as more and more Britons try to get on the property ladder.
This rise in interest-only mortgages has coincided with a rise in average house prices of 41 per cent over the same period.
Figures from the Council of Mortgage Lenders reveal that in 2002 the percentage of first-time buyer mortgages that were interest-only was 11 per cent, a number which rose to 21 per cent in 2005.
Meanwhile, the average house price rose from £95,356 in 2002 to £160,319 in 2006, according to Nationwide figures.
Interest-only mortgages are often more attractive to the first-time buyer because the monthly repayments are lower than repayment mortgages. This is because the mortgage-holder only pays the interest on the loan.
However, the draw-back is that when it comes to selling the property, all the money borrowed has to be given back, and if the price of the house has fallen since the loan was taken out, this can cause big problems for the mortgagee.
The surge in the number of interest-only mortgages being taken out is a cause of concern for price comparison site moneysupermarket.com, which says it is important for consumer to consider all their options before plumping for the interest-only deal.
It advises that consumers doing so should make sure they can afford to invest in savings elsewhere, in case of a downturn in the housing market.
Louise Cuming, head of mortgages at moneysupermarket.com, said: "I would whole-heartedly urge consumers to think carefully before taking out an interest-only mortgage - even if they are attracted by the lower monthly payments.
"People should only consider this type of mortgage if they are sure they will be disciplined enough to save money elsewhere - as well as setting aside any additional lump sums of cash, like bonuses ? and not touch it."
Research shows that the longer one stays on an interest-only mortgage, the larger the monthly payments will be when switching to a repayment mortgage.
For example, according to moneysupermarket.com, a £150,575 mortgage over 25 years paying interest-only for the first five years with a term tracker of 4.99 per cent will require monthly payments of £627.80.
Switching to repayment after the five years means monthly payments increase to £995.53. Had the mortgage been based on repayment from the start, monthly payments would have been £881.70 - £113.83 less.
Over the course of 25 years, this saving would add up to around £12,000.
Ms Cuming added: "If a homebuyer can afford to repay their mortgage from the off, then I would urge them to consider this option seriously."
For the latest mortgages visit our mortgage guide
This rise in interest-only mortgages has coincided with a rise in average house prices of 41 per cent over the same period.
Figures from the Council of Mortgage Lenders reveal that in 2002 the percentage of first-time buyer mortgages that were interest-only was 11 per cent, a number which rose to 21 per cent in 2005.
Meanwhile, the average house price rose from £95,356 in 2002 to £160,319 in 2006, according to Nationwide figures.
Interest-only mortgages are often more attractive to the first-time buyer because the monthly repayments are lower than repayment mortgages. This is because the mortgage-holder only pays the interest on the loan.
However, the draw-back is that when it comes to selling the property, all the money borrowed has to be given back, and if the price of the house has fallen since the loan was taken out, this can cause big problems for the mortgagee.
The surge in the number of interest-only mortgages being taken out is a cause of concern for price comparison site moneysupermarket.com, which says it is important for consumer to consider all their options before plumping for the interest-only deal.
It advises that consumers doing so should make sure they can afford to invest in savings elsewhere, in case of a downturn in the housing market.
Louise Cuming, head of mortgages at moneysupermarket.com, said: "I would whole-heartedly urge consumers to think carefully before taking out an interest-only mortgage - even if they are attracted by the lower monthly payments.
"People should only consider this type of mortgage if they are sure they will be disciplined enough to save money elsewhere - as well as setting aside any additional lump sums of cash, like bonuses ? and not touch it."
Research shows that the longer one stays on an interest-only mortgage, the larger the monthly payments will be when switching to a repayment mortgage.
For example, according to moneysupermarket.com, a £150,575 mortgage over 25 years paying interest-only for the first five years with a term tracker of 4.99 per cent will require monthly payments of £627.80.
Switching to repayment after the five years means monthly payments increase to £995.53. Had the mortgage been based on repayment from the start, monthly payments would have been £881.70 - £113.83 less.
Over the course of 25 years, this saving would add up to around £12,000.
Ms Cuming added: "If a homebuyer can afford to repay their mortgage from the off, then I would urge them to consider this option seriously."
For the latest mortgages visit our mortgage guide
posted by Bruce Wayne at 7:11 AM
Interest-only mortgage take-up doubles
10 Comments:
The scary thing to me is that it seems that over 20% of First Time Buyer mortgages are now interest only. In a low wage inflation environment, this debt is just not going to erode. If the average FTB is 34, they'll be 59 at the end of the term, with no capital repaid unless they wise up along the way. Even with a decent pension at the end of it all, how will this be repaid?
This is the real problem I foresee 20 years from now - people only a few years from their retirement age with no endowment to pay the capital - what will they do?. There are 2 things which I feel make this situation worse than pre-last crash:
1, The average earnings ratio is bigger
2, Interest rates are at their lowest
The debt will erode oh-so-slowly - then factor in some modest rate rises over the next decade and you can see that it just will not get any easier for many people with large mortgages unless their salary jumps significantly through promotion etc.
Of course they are fully signed up to the concept of permanent house price inflation. They believe that they will use the capital growth as a deposit on the next step of the ladder and maybe think about a repayment mortgage by rung 2 or 3. It has worked in the past of course but going forward???
Also to note- the average first time buyer is over 30. By this age the main period of significant career advances is over for most people. Where is the extra money to repay the capital going to come from?
Hi can anyone help
i own a property which i lived in for a short period of time and then rented out.
it has no mortgage.
i now wish to buy a property as a home rather than renting in another town,
if i obtain an interest only mortgage on the property with no mortgage, and use the funds raised on the buy to let mortgage towards purchase of new property to be used as my main home, when assessing my tax if say i have £5k rent recieved and £4k interest payment on mortgage will be tax be £5k - £4k ie tax on £1k less any other expenses to do with rented property
i thought this was the case but i have been told not if money raised is used to purchase a property as a home for you to live in?
anyone any ideas?
Hi jeffers,
I'd always understood that it was the purpose of the loan rather than the property it was secured against, which was the decider so on that basis it wouldn't be tax allowable. However an accountant who posts suggested that certain changes which brought letting income within schedule D [Greek to me too mate!!] means it is - provided the loan doesn't exceed the original purchase price of the property.
I think you need to take professional advice, to me it's a possible maybe!
Depends how you use an interest only mortgage. I don't think they are the root cause of all evil. For example, an interest only mortgage is probably the equivalent of renting anyway. So if you are renting and saving and prices are not dropping, you could get an interest only, save and then make a capital payment every now and then.
This would, of course, fall apart if prices started to drop.
The real trick is being disciplined to take this approach. I personally like this because you could use the money to invest as you see fit, in order to pay for it. But having read the "A Nations Of Spendaholics" thread I doubt many could take this approach.
I guess over 25 years the mortgage will or should get paid off, unless you paid a stupid sum for the house in the first place. House prices seem to rise and fall quite a bit over time although it gets harder to track with inflation.
I'd assume the interest only mortgages are for a short term, eg: first 2 years? Having one over the life of the mortgage would be as daft as those equity (?) mortgages where the stockmarket paid it off, or didn't in most cases. Then again, the banks aren't worried I guess.
With an IO mortgage, presumably you're going to get hit badly if the interest rates rise as you're paying effectively the interest on the same amount of money all the time so any rise will hit you very hard?
I sincerely regret not getting an interest only mortgage. The money I pay towards principal would be better invested elsewhere. Mortgage interest attributable towards the purchase of your home is one of the few deductions allowed under the AMT. When my spouse and I bought our home 6 years ago, we had no idea that we would be up against the AMT. The expansion of the child tax credit and other tax cuts passed since we bought our house have been great for our family, but now we are flirting with the AMT. As with everything, you have to look at what the best use of your money is. Directing money to other investments rather than paying down our mortgage would be the best use of our funds right now. Tax laws change though so we might be singing a different tune and be happy that we paid off our mortgage by our mid-forties.
I am purchasing a condo, in which I will probably live for 5-7 years. One lender I've spoken to has recommeneded that I got with a 5 year interest only ARM, because idea is that one a 30 year fixed, I would basically be paying only interest for the first 10 years anyway. Since I don't plan to live there long term, he says that I should pay interest only when I live there, and invest the saved cash elsewhere, CD, stocks, whatever, to maximize my return.
This almost seems like sound advice to me, but something still bothers me about it, is there a flaw that I am mising here? The main drawback I can think of is that if I chose to stay in the property longer, or to at least keep owning it and renting it out, I would probably have to refi down the road, most likely at a higher interest rate.
So what do you all think of this situation? Is there some view point or other factor that I have missed here?I would not be using an interest only loan to just stretch my means here, but I could seriously reinvest the cash flow. however, my financial adviser and my parents have advised me to just stick with a 30 year fixed, and I am just kind of torn between the two.
Oh, in case anyone is interested, I am buying in San Diego, in the Mission Valley Area specificilly.
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