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Are Interest Only Mortgages A Good Option?

Aug 17, 2007
Around 1 out of ever 5 mortgage borrowers last year elected for an interest only mortgage scheme. Of these, approximately 30% were new first time house buyers. 'So what?', you may be saying. And here's the problem: in almost every single case where a borrower has elected to purchase a home with an interest-only mortgage, the scheme was one that was advised to them by a mortgage broker.

In nearly every single case, the borrower was not required to show that they could repay the principal sum borrowed on the day the mortgage matures. In other words, no borrower was asked to show that they had taken out an underlying savings program that would have sufficient funds to cover repayment of the principal or any short-fall in the borrowing on the maturity date. Sound familiar? Well it should do, because it has all of the underlying telltale signs of the recent endowment mortgage misselling scandal.

If you already have an interest only mortgage, you should not immediately panic that you're not going to be able to afford to repay your home loan when it matures. However, what you will immediately need to do is to take a look at your loan documents and see if you have been required to put in place some form of savings scheme that will help you to repay the principal outstanding on the loan on the day it matures. For example, is some part of your monthly repayments being put aside in an equity-linked savings account? If so, then there is a good chance that you should be OK; provided, of course, that the amount you are putting away is enough to cover your repayment and that you will not be expected to repay a significant shortfall.

If however, you discover that you have not been asked to put in place a savings scheme that is going to help you repay the principal sum of the home loan on the day that it matures, then you will need to contact your lender and ask them for some advice as to what action you should take next to rectify the situation. You should keep in mind that even if you have to make top up payments now, in order to get your program back on track, this is far less likely to cause you a significant financial problem the burden of having to pay a massive one-off lump sum (also known as 'balloon') on the day the loan matures.

In addition, if you find that your mortgage broker sold you an interest only home loan without having warned you of what the dangers were having such a scheme without putting in place some form of underlying savings scheme, you should consider talking this through with your Citizens Advice Bureau to see what can be done about this. Here, it is likely that the problems associated with interest-only home loans is going to mushroom in the next few years, especially when to true number of first time buyers who may have purchase their new home using this scheme and will likely have had little or no extra money to save comes to light. As such, it is extremely likely that both your lender and you local CAB will be aware of the problem.

The only issue that really remains is whether or not those who have an interest only home loan without any underlying form of savings scheme in place wish to face up to the fact that a very real and serious threat may now exist that the home they have been paying for all of these years may not actually be their one day.
About the Author
Joseph Kenny writes for the Personal Loans Store, where you can home loans and read the article on Remortgages.
Visit today: http://www.ukpersonalloanstore.co.uk/
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