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Will interest-only deals be the next scandal?

Lenders and brokers are warning that a future mis-selling scandal could surround borrowers taking out interest-only mortgages without setting up repayment vehicles.

Some believe borrowers are mistakenly relying on their properties to increase in value to pay off their debts and there is concern people are buying consumer items with money that could be contributing towards mortgage payments.

Platform has warned that while there is a place in the market for interest-only mortgages, intermediaries must explain the ramifications fully to their clients.

So, Mortgage Strategy asks: “Have you found that interest-only mortgages are becoming more popular and what would your advice be to people taking them on? Is there a risk of another mis-selling scandal?”

Peter Gladdy, Mortgages Direct

We have seen no noticeable rise in clients requesting interest-only mortgages. We would certainly not recommend a pure interest-only mortgage unless the client could positively demonstrate their intended method of repayment at the end of the contract. To encourage the use of such products just for the purposes of keeping the cost down would be unprofessional and could certainly be construed as mis-selling.

Nicholas Leeming, propertyfinder.com

Homebuyers must not lose sight of financial reality. It is not enough simply to afford the interest on a mortgage without considering how you are eventually going to repay the loan. You must be sure you can accumulate the capital to pay off the mortgage, preferably through a proper savings plan. Winning the Lottery is not an option.

Nicola Severn, Mortgage Trust

Interest-only mortgages are often the right product for landlords building a buy-to-let portfolio. Along with long-term capital growth landlords earn their return on the difference between the rental income and mortgage interest on their properties. Paying back loans is not important in the early phase of building their businesses as landlords are looking to grow their portfolios. They will look to repay their loans as their businesses mature.

Peter Brodnicki, Mortgage Advice Bureau

Interest-only mortgages have been gaining in popularity as rates increase, particularly among first-time buyers. MAB urges buyers to take a long-term view. If a buyer intends to save money in the short-term by opting for interest-only they must ensure that they can continue to be able to afford payments when they switch back to a repayment scheme. MAB always ensures buyers are made aware of the long-term implications and we therefore do not believe that there will be another mis-selling scandal.

Jeremy Hicks, Chelsea

Our figures show no difference in the level of interest-only applications or completions during the past three months compared with the same period in 2003. There is still a place for interest-only mortgages in areas such as buy-to-let but we find the majority of applications are for repayment deals. Today&#39s applicants seem aware of the difference between repayment and interest-only which reflects good education and transparency in the market.

Matthew Wyles, Portman

Portman has detected a slight shift toward interest-only applications during 2004 although the majority of our applicants still choose repayment deals. For some customers interest-only provides the flexibility to make lump sum part-repayments. The mortgage adviser has a clear duty to remind the customer of the need to make adequate provision for repayment at the time of the application.

Ray Boulger, Charcol

Most B2L borrowers choose interest-only because they will ultimately repay the mortgage by selling property and it is more tax-efficient. First-time buyers may be tempted by interest-only to minimise initial monthly payments. This is fine in the short-term but it is essential to ensure that complacency doesn&#39t set in, especially for the less financially disciplined. The increase in pure interest-only mortgages is due more to the demise of the endowment than the recent rises in interest rates.

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