The Council of Mortgage Lenders (CML) says that almost 6 million people have interest-only mortgages. When you have an interest-only mortgage, your monthly payments only go toward the interest on the loan, not the loan itself. Also, the CML has found that many people who are buying their first home are looking for interest-only loans. Interest-only loans are being used by more and more first-time buyers every year. Why is this type of loan becoming so popular? Well, research has shown that many first-time homebuyers can only afford to buy a home if they can pay only the interest on their loan.
Say a homebuyer wants to borrow GBP100,000 for three years at a fixed rate of 4.99%. This is an example of how an interest-only mortgage works. This person would have to pay back the loan with a payment of about GBP600. But if you just pay the interest on this loan, their monthly payment would drop to about GBP400. The main problem with this type of mortgage is that the homeowner who wants to borrow money must have a way to pay back the loan's principal. If not, when the loan term is over, they will still owe the same amount.
A mortgage lender used to require that anyone who wanted a loan be able to show that they could pay it back. Now, all that needs to be done is to remind the homeowner that they need to pay off the capital. Most of the time, people who want an interest-only loan have to have some kind of investment, like an ISA (independent savings account), that will help pay off the loan when the mortgage terms are over.
It is very important that you carefully consider all of your options and give a lot of thought to how you will pay back the loan's capital. Many people depend on house prices going up to help them. If wages are going down and prices are going down, this won't make people feel safe. This could cause trouble for the buyer in the long run.
So, you might be wondering what you can do now to pay off this loan. You could think about a mortgage where part of each monthly payment goes toward paying off the debt. This is more expensive than loans that only pay the interest, but it helps pay down the debt because the payments go toward it. If you have an interest-only loan, you may be able to do a few things. You could, for example, switch part of your mortgage to a repayment mortgage or open an Individual Savings Account (ISA) and start saving every month. This is free of taxes, and if you save, you'll have more money to put toward the capital.
