Interest Only Mortgages

With house prices at record levels many people find it difficult to get onto the property ladder.  Even those people who have sufficient income levels to get a mortgage can find it hard to find a mortgage option that they can afford to repay.

Many people are taking out their mortgage over a longer term.  Traditionally the typical mortgage term has been 25 years.  However, an increasing number of people are taking out their mortgage over up to 40 years.  This may be on the hope that their financial situation will change and so they can reduce this term.  But people must be aware that this could mean they are still repaying their mortgage into retirement.

Another option many people are taking is what is termed an interest only mortgage.  This means you are not repaying any capital borrowed.  For instance, if you borrow £150,000 over 25 years, your monthly repayments will only cover the interest on your mortgage, making them cheaper than a traditional repayment mortgage.  However, at the end of 25 years you still owe your mortgage lender £150,000.
People taking this option are banking on their financial situation changing meaning they can eventually afford to take out an investment vehicle or switch to a capital and interest repayment mortgage.  This is all well and good but if this time never comes people could find themselves in severe financial difficulties.

The jump from interest-only to capital repayment can be a huge. You can soften the blow by using the option of partial repayments which many lenders now offer, allowing you gradually to build up the percentage of the capital that is paid at a rate comfortable to their circumstances.
An alternative option, providing low initial repayments would be a fixed or discounted deal with extended tie in, but although these rates may appear attractive, the exit fees, set up fees and higher rate during the tie in period could soon take a shine off those very attractive low monthly payments experienced during the first couple of years.

While interest only may be the only option for you to be able to step on to the property ladder, in order to prevent major problems in the longer term, you need to ensure you are fully aware of their situation, the consequences of just paying the interest and the true cost of fully paying off the mortgage. You perhaps should receive regular advice and documentation, detailing your position and the costs/risks you may face