More than 25% of homeowners are paying for their homes with an interest-only mortgage say the Abbey. The reason is obvious their monthly payments are much less. For example, a 125,000 interest only mortgage at an interest rate of 5% and repayable in 25 years time, costs 525 per month – but on a repayment basis the monthly cost rises by 210 to 735 per month.
Understandably, this level of cash saving has proved highly popular with first time buyers struggling to get the feet on the property ladder and others working on a tight monthly budget. But there’s a time bomb lurking. 37% of homeowners with interest only mortgages are failing to save any money for repaying the mortgage when the mortgage capital eventually becomes repayable at the end of the term.
The Financial Services Authority (FSA) is concerned about this problem so last year they ushered in new rules requiring lenders to seek evidence from new borrowers about the steps they’re taking to repay the capital. And it won’t be sufficient for the borrower to say that they intend to repay the mortgage by selling the property. From now on, the FSA is likely to judge any new mortgage that...
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