Independent online mortgage research site mform.co.uk is predicting that more mortgage customers will switch to interest-only loans in a bid to avoid the worst effects of the credit crunch payment shock.
It warns that currently around 24% of home movers and first-time buyers take out interest-only loans without specifying a way of paying off the mortgage.
The difference in monthly payments on an interest-only basis and a capital and interest basis can be as much as £225.25 or £2,703 a year on a £150,000 loan, mform.co.uk says.
The Financial Services Authority has highlighted that more than 1.4 million cheap fixed-rate deals are set to end this year with many of these borrowers facing rises in monthly mortgage costs of as much as 40 per cent.
Francis Ghiloni, marketing and business development director at mform.co.uk, says: “Moving to interest-only repayments on your mortgage will help reduce your monthly costs.
“And it will be tempting for the 1.4 million borrowers whose fixed-rate deals are coming to an end this year. Many of them are on deals as low as 4.23 per cent and with the current average fixed rate of 6.0 per cent they face serious payment shocks.
“However tempting switching from repayment to interest-only may be, unless borrowers have plans in place to eventually repay their loan they may be simply storing up problems for the future. Getting to the end of the mortgage term and still owing the initial debt would be disastrous.”
It urges anyone contemplating a switch to interest-only to be careful and to research the market to find the best possible deals before taking such as step.
Analysis by mform.co.uk shows 21% of loans advanced in 2006 were on an interest-only basis with borrowers not specifying a repayment method compared to 24% in 2007. In January 2008 around 24.5% were on an interest-only basis.