Abbey said not too long ago that more than 25% of homeowners choose to get an interest-only mortgage. Look at this example based on a GBP125,000 mortgage with a 5 percent interest rate to see why the monthly payments are so much lower. The interest-only mortgage will cost GBP525 per month, but the repayment mortgage will cost GBP735 per month, which is an extra GBP210 per month. That's a lot of money!
First-time buyers are the problem because they can't afford the repairs.
Abbey said not too long ago that more than 25% of homeowners choose to get an interest-only mortgage. Look at this example based on a GBP125,000 mortgage with a 5 percent interest rate to see why the monthly payments are so much lower. The interest-only mortgage will cost GBP525 per month, but the repayment mortgage will cost GBP735 per month, which is an extra GBP210 per month. That's a lot of money!
First-time buyers are at the heart of the problem. They can't afford to pay back their mortgages, so they choose interest-only loans instead. But the interest-only mortgage must be paired with a good way to save money to cover the remaining capital at the end of the mortgage term. This is something that 37 percent of people don't do.
Now, the Financial Services Authority (FSA) has stepped in because it is worried that many homeowners will be short at the end of their mortgage term. Lenders now need hard proof from new borrowers that they have set up a way to save enough money to cover the capital. Before, people who wanted to borrow money just had to say what they planned to do, like sell the property to get the money. But that won't be good enough anymore. The lender will need to see that you have a good plan in place before they can give you an interest-only mortgage. If they did, it would be against the law, and the FSA would punish them for it.
The lender will now need to see proof of a personal equity plan (PEP), an Individual Savings Account (ISA), or proof that 25 percent tax-free cash from a personal pension plan (PPP) will eventually cover the outstanding capital. It won't be enough to say you'll set it up; you'll have to show that you've already done so.
Since the new rules have only been in place for a short time, different lenders are already putting their own spin on them. The Nationwide Building Society won't let borrowers set up an interest-only mortgage based on a future inheritance or a future pay raise. Also, expected bonuses won't work unless you can prove that you will definitely get them. Performance-based bonuses can't be made sure of, so they don't count.
People who already own their own homes won't have to go through the same strict checks. Nationwide will let you be a customer as long as you borrow less than two thirds of the value of the new property and have at least GBP150,000 in net equity in your current home.
Most mortgage advisers won't recommend interest-only mortgages because they pose too much risk, and this is something that most people agree with. Repayment mortgages make sure that all debts are paid off at the end of the term, but a separate way to save money could fall short, leaving you with a shortfall. Most mortgage consultants will suggest a repayment mortgage to avoid this risk.
On the other hand, an interest-only mortgage is a good short-term solution. If you can tell your mortgage adviser that you plan to switch to a repayment mortgage as soon as you can afford to, they may support your choice. Even if this is the case, you will still need to give the same information as if you planned to keep it for the whole term. If you don't have the right paperwork, you just won't be able to get an interest-only mortgage.
The best solution all around is to get a mortgage that lets you pay more than just the interest. So, if you have extra money, you can put it toward your mortgage and lower the amount you owe. There are many of these kinds of mortgages, and many of them let you pay back 10 percent or more in a single year. You don't have to do it if you can't afford it, but at least you have the option. Just make sure that you can overpay without getting in trouble before you sign up.
