My Mortgage Direct warns against interest-only

My Mortgage Direct is warning consumers against switching to interest-only deals to keep their finances afloat as they come off fixed rate deals.

It says that customers coming off fixed rate deals at the moment are also being hit by the Bank of England base rate rises, creating a “double whammy” which could see their repayments shoot up overnight.

But it warns they should be wary of opting for interest-only deals as a means of keeping their monthly outgoings down.

Cath Hearnden, director of My Mortgage Direct, says: “We are seeing increasing numbers of borrowers who, rather than face reality of higher monthly expenditure, are using an interest-only remortgage as a form of defence against the onslaught of rising repayments until the cavalry arrives.

“Switching to interest-only soothes their jangled nerves as it deals with the immediate problem of a sudden drop in disposable income until they put plan B into action.

My Mortgage Direct says the strategy is often justified if the borrower plans to downsize and use the equity from the sale to redress shortfall in income or if they intend to switch back to a repayment mortgage when their income increases.

However, it says that in reality, interest-only payments become routine and there never seems to be a right time to switch back to capital repayments.

Monthly repayments on a mortgage of £150,000 over 25 years at a fixed rate of 4.5%, would have been £833.75.

A new rate of 5.5% would cost £921.13. But interest-only would take it back down to £687.50.

Hearnden adds: “It is easy to see the attraction of the interest-only escape route, but there are ways of mitigating the effects of rising costs.

“We are advising clients who feel this is a necessary course of action that they could compromise by opting for part interest-only and part capital repayment to keep the repayments low.

“For example, the same mortgage at 5.5% with £100,000 on repayment and £50,000 on interest-only would cost £843.25, which is almost the same as the borrower would have been paying previously.”