Thousands switch to interest only to cut mortgage payments

31st May 2011

Repayment mortgages which, over time, cut the capital sum owed, are generally a few hundred pounds a month more expensive and the paper believes that people are switching to the cheaper vehicle because they have to.

Some may, of course, also be setting money aside in a repayment vehicle and regulators and mortgage experts encourage people to do this as a matter of course.

But the Telegraph says that in the last three years, around 300,000 people have switched to a repayment mortgage, involving total borrowings of around £60bn.

The newspaper was told by the regulator that between the onset of the financial crisis in 2007 and the last three months of last year, the value of interest-only mortgages increased by £99bn and the number of borrowers by 369,370. It believes that around two thirds of the increase came from struggling households.

Converting to an interest-only mortgage in difficult times is the lesser of two evils certainly when compared with repossession but as the paper points out, it runs contrary to the FSA's own position which is that repayment mortgages should be accompanied by a repayment vehicle of some sort.

In the past, this repayment vehicle was usually an endowment invested with an insurance company. For a long time, given the high interest rate environment, this often meant that the endowment would pay off the capital sum when the interest was paid off. However insurers were slow to adapt to a changing economic environment and low returns on shares in the 1990s.  Some high charges and, on occasions, poor advice, meant that consumers were sometimes left with a shortfall though some were able to claim compensation.

However with the withdrawal of endowment products, it become much more common practice for consumers to take out an interest only mortgage without a repayment vehicle or to rely on rising house prices to help them manage any shortfall ultimately perhaps by selling and moving. There may be less freedom to do that depending on house prices.

However on the Telegraph message boards, the concept and the practice of using an interest only mortgage has some support.

dawnfromlondon writes: "I don't see what's so wrong with interest only mortgages?  As long as the mortgagee knows that the capital won't be paid off it's no worse an investment than renting, and no-one's suggesting banning that?

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