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Consumers cautioned on interest-only mortgages

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24/04/2006

Experts have warned that homebuyers who took out interest-only mortgages as a way to get on the property ladder could pay more in the long run. Andrew Partridge reports.

The number of first-time buyers who have taken out interest-only mortgages has doubled since 2002, with many using the mortgages as a means to get on to the property ladder.

An interest-only mortgage is seen as a low-cost way to buy a first property by many, as your monthly mortgage payments are smaller because you only pay the interest. However, you should make additional payments into a separate investment vehicle in order to pay off the outstanding debt at the end of the term.

But with a 41% increase in house prices in the last four years, some people that have taken out interest-only mortgages hoping that increases in house prices will more than cover their investment.

However, while the lower monthly payments mean these types of mortgages can be tempting, moneysupermarket.com warns consumers only to consider an interest-only product if they are disciplined enough to put extra money aside to repay the debt at the end of the term.

And if you intend to switch to repayment deal after a few years, as many borrows do, bear in mind the cost implications. Moneysupermarket.com’s research shows that the longer you remain on an interest-only mortgage, the larger the monthly payments will be when switching to a repayment mortgage.

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!

She added: “If you thinking of taking out an interest only mortgage and recognise that you will be financially stretched by this monthly payment, then I urge you to reconsider if now is the right time for you to buy at all.”

So you should ensure you consider the consequences of an interest-only mortgage over the long term, and you should think through what could happen if house prices stagnate, or even crash.

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