Mform points to interest-only rush

Mform.co.uk predicts that a rush of consumers will opt for interest-only mortgages in a bid to stem rising costs.

Currently, only about 24% of home movers and first-time buyers who take out interest-only deals specify a way of repaying their mortgages.

With lenders pulling their cheap deals en masse, Mform.co.uk says this trend is likely to continue.

The Financial Services Authority has highlighted that more than 1.4 million cheap fixed rate deals are set to end this year. Many of these borrowers face rises in monthly mortgage costs of as much as 40%.

Mform.co.uk says the difference in monthly payments between interest-only and capital and interest repayment deals can be as much as £2,703 a year on a £150,000 loan.

Francis Ghiloni, marketing and business development director at Mform.co.uk, says: “Moving to interest-only repayments will help reduce monthly costs. And it will be tempting for the 1.4 million borrowers whose fixed rate deals come to an end this year. “Many of them are on deals as low as 4.23% and with the average fixed rate at 6%, they face serious payment shocks.”

He adds: “But unless borrowers have plans in place to eventually repay their loans, switching to interest-only may simply store up problems for the future. Getting to the end of the mortgage term and still owing the initial debt would be disastrous.”

Roy New, a London-based sole broker, says he’s already fielded a number of enquiries from borrowers that want to switch to interest-only.

But he says: “I wouldn’t advise clients do so as it’s just the same as renting. Over the next year we’re going to see a huge influx of loans that will need sourcing.

“Unless they’ve clean credit records they’ll have to stay where they are or switch to interest-only – although we’re going to need disclaimers to say that we didn’t recommend interest-only deals.”