Twenty percent of lenders won’t offer interest only mortgages

According to recent research, around twenty percent of lenders in the UK refuse to offer customers interest only mortgages, despite the fact that borrowers can drastically cut their monthly outgoings with this type of mortgage loan.

The study was carried out by MoneyExpert, and revealed that around one in every five UK lenders was so unsure about interest only mortgages that they would not offer them on their list of various mortgage products and types.

An interest only mortgage, as the name suggests, is a type of mortgage loan where the borrower spends the term of the loan making repayments on just the interest on the amount that he or she has borrowed. The repayments made on a repayment mortgage (also known as a capital and interest mortgage) go towards paying off both the amount borrowed and the interest.

With a repayment mortgage the debt goes down over time, and by the end of the term the borrower will have repaid all the interest and the original loan. However, with an interest only mortgage the borrower repays only the interest, and at the end of the term will still owe the full amount that he or she borrowed.

The study revealed that a saving of around two hundred and forty pounds a month could be made by a borrower with a £150,000 interest only mortgage compared to the same size repayment mortgage. Borrowers on interest only mortgages need to look into other investments as a sideline to the interest only mortgage, so that they can accrue the funds to repay the mortgage loan at the end of the mortgage term.

It is the risk of not being able to raise the cash to pay off the original loan at the end of the mortgage term that worries some lenders, but in many cases an interest only mortgage is the only way that some borrowers can afford to get onto the property ladder.

Tom Smith
24.03.07

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