One in five lenders won’t allow interest-only mortgages

Borrowers can cut monthly repayments by up to £238, says

One in five lenders won’t allow customers to opt for interest-only residential mortgages as concern mounts about borrowers being unable to repay their loans, research from* shows.

However homeowners choosing to only pay the interest on their home loan can save up to £2,860 a year in repayments on a typical mortgage, according to analysis by the independent financial comparison service.
And interest-only mortgages are increasingly popular – Council of Mortgage Lenders’ figures show the number of interest-only mortgages rose 33 per cent last year to 222,400 despite worries about borrowers banking on house price rises to allow them to pay off their loans.

And research reveals around 18 per cent of the 115 mortgage lenders on the market will not lend to customers unless they have a repayment scheme in place.

The attractions of interest-only loans though are obvious – on a £150,000 mortgage at the average two-year discount rate of 5.68 per cent borrowers are saving £248.30 in monthly payments. On a 25-year term borrowers pay £710 a month if the mortgage is interest-only and £948.30 a month if it is on a repayment basis.

Sean Gardner, Chief Executive of, said:

"Lenders are cautious about the rise in interest-only mortgages and those who do offer interest-only loans take precautions such as limiting loan to value ratios to 75 per cent.

"Lenders also ask borrowers about how they plan to repay the loan as FSA regulation means they have to ensure customers are fully informed about the risks.

"There are risks involved in taking out an interest-only mortgage. To some extent borrowers are taking a punt on house prices continuing to rise and being able to repay their loan by downsizing or receiving a windfall.

"However as long as borrowers are aware of the risks then it can make financial sense to opt for an interest-only loan as the monthly savings are significant and can make the difference in being able to afford a mortgage."

Lenders who do not offer interest-only mortgages unless borrowers have a repayment plan in place elsewhere include Bradford & Bingley.

Those which do allow interest-only mortgages often set limits such as minimum salaries of £25,000 or loans-value of 75 per cent.

Home buyers can opt for a range of options including traditional repayment where they pay the interest each month as well as repaying part of the loan and part-and-part in which part of the loan is repayment and part interest-only.

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* analysis of the Defaqto Aequos Database, 21.03.07

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