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Interest-Only Mortgages Are Heading For Extinction

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The finances of hundreds of thousands of homeowners are so precarious that even a small increase in interest rates could push them over the edge, the Financial Services Authority has warned.

Since the credit crunch, 250,000 homeowners have switched from a repayment to an interest-only mortgage - where the initial sum borrowed is not repaid - because they are in arrears or have other financial problems.

Switching from repayment to interest-only lowers monthly mortgage costs. Lenders are normally prepared to allow borrowers to do so for a short period, but it is risky.

Why have borrowers been switching to interest-only?

Since the credit crisis, lenders have pushed up the cost of borrowing.

When many homeowners came to the end of fixed-rate and discounted mortgage deals they were faced with rocketing monthly repayments. With some borrowers suffering wage cuts and even job losses, many asked to switch to interest-only.

How much cheaper is interest-only?

Based on a typical £150,000 mortgage over 25 years at a rate of 5.5%, the monthly savings would be £244 compared with repayment.

What are the risks?

Switching to interest-only can be a sensible way of buying time to resolve a short-term problem such as redundancy. But Ray Boulger, mortgage expert at broker John Charcol, says: 'Homeowners should be working towards getting back to capital repayment. The mortgage debt still has to be paid off.' Lenders have tightened their criteria on interest-only lending and this will make it more difficult for such borrowers to remortgage, particularly if house prices, and equity in the home, drop.

'Borrowers who want to take their existing interest-only loan with them when moving house, either because they have a lifetime tracker or because they want to avoid big redemption penalties, for example, are increasingly being refused by their lender,' says Boulger. 'Ironically, some are refused even where they have wanted to trade down.'

Will my lender let me move to interest-only?

Lenders won't allow borrowers to switch just because they want more spare cash. But if you are genuinely experiencing financial difficulties they may allow it. The less equity you have in your property, the harder it will be. Remortgage customers need at least 25% equity.

Are there fees and charges if I switch to interest-only?

Some lenders may not charge. In some cases there may be a nominal administration fee of about £75. If you are remortgaging at the same time there may be associated costs.

Is there an alternative if I am suffering financially?

You may be able to increase the term of your mortgage, for example up to 30 years, to bring monthly costs down, although the overall interest bill will grow. A few lenders may allow you to take a 'holiday' and miss a couple of monthly payments.

I can afford my mortgage but prefer to have an interest-only loan. Is this still possible?

Many borrowers choose an interest-only mortgage not because of affordability issues but because they want flexibility in how and when they repay the main capital debt.

Some homeowners use an annual bonus to repay capital, others may want to set up a savings vehicle, such as an Isa, or hope they will sell the property at a profit to clear the mortgage.

But David Hollingworth at broker London & Country Mortgages, of Bath, Somerset, says: 'Lenders will want to know you have a repayment vehicle in place. Many won't accept house price rises, salary bonuses or a future inheritance.' Tim Jones, 38, a marketing manager for a medical nutrition company, has had an interest-only mortgage for 12 years. He likes the flexibility because he uses an annual dividend from his business - a private health club - to pay off chunks of the capital.

But Tim, who lives with wife, Laura, 31, and their three sons, Theo, 5, Rowan, 3, and Asher, four months, in Bath, says some banks would not lend on an interest-only basis when he recently remortgaged. 'Lenders are more cautious,' says Tim.

Tim and Laura have switched to an interest-only lifetime tracker with ING Direct at 1.85 percentage points above the base rate. It gives a starting pay rate of 2.35%.

There was a £945 arrangement fee and borrowers need at least a 40% deposit or equity. Those with less equity will pay a higher rate.

ING will accept endowments, Isas, unit trusts and the sale of the property (as in Tim's case) subject to the loan to value being below 60 per cent and with at least £150,000 equity in the property. Tim is confident he will have paid off the debt through overpayments well before the end of the 25-year term.

So you lose your job, switch to an IO mortgage to save a few bob, but end up handing over near £1000 squids to do so.

Man oh man, are we stupid in this country or what?

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So you lose your job, switch to an IO mortgage to save a few bob, but end up handing over near £1000 squids to do so.

Man oh man, are we stupid in this country or what?

Yes very

A few % on IRand the banks are going to make the Wilsons look like monopoly champions. IR will have to rise eventually

As Johnny Rotten said Ha Ha ever feel like you've been cheated?

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