An interest only mortgage is where people borrow money and pay monthly interest payments on it. They don’t make a contribution to paying off the Capital that they owe. The idea is that an interest only mortgage should work alongside another investment scheme which builds up equity to be able to pay off the mortgage in the future. However there is evidence that many people with interest only mortgages are failing to save up money to pay the mortgage back.
This is from BBC – mortgage news
A significant minority of people with interest-only mortgages do not have “robust plans” to repay them, warns the Financial Services Authority (FSA).
Its report scrutinised the plans of 857 people who had taken out these mortgages and found that 15% had weak or non-existent repayment strategies.
About 24% of all new mortgages are lent on an interest-only basis.
The FSA warned lenders to be very careful when deciding which customers should be granted these mortgages.
“There is nothing wrong with interest-only mortgages,” said Clive Briault of the FSA.
“However, consumers must be very clear about how they are going to repay the loans they take out.”
One in five people questioned by the FSA said they would struggle with other financial commitments if interest rates rose by just 1% above the current level of 5%.