Interest-only mortgages require good planning
Released
on: December 2, 2008, 7:41 am
Press
Release Author: Think
Money
Industry:
Financial
Press
Release Summary: Responding to the news that over one million
homeowners on interest-only mortgages do not have a specific repayment
plan for their remaining mortgage capital, financial solutions
company Think Money have emphasised the importance of good future
planning with regard to interest-only mortgages, and have advised
anyone looking to take out a mortgage to seek expert mortgage
advice beforehand.
Press
Release Body: Responding to the news that over a million homebuyers
have been offered interest-only mortgages with no savings plan
to repay the remaining mortgage debt,
financial solutions company Think Money have advised
all homeowners on interest-only mortgages to carefully consider
their plan of action for the future, adding that failure to do
so could result in significant financial hardship later in life.
LV= estimate there to be around
2.9 million interest-only mortgages active in the UK. Of these,
the report claims that 1.3 million – accounting for £74 billion
of mortgages – have no specific savings plan in place to pay off
their remaining mortgage debt once the interest-only
period expires.
That
means that around 45% of interest-only mortgages carry no specific
capital repayment plan. LV= claim that 41% of these homeowners
are relying on rising property value and cashing in equity to
pay off the remaining mortgage capital, while 21% plan on using
other investments.
More
worryingly, 13% of respondents said that they did not know how
they would pay off their remaining mortgage capital, while 12%
said they hadn’t given the matter any thought.
Mike
Rogers, LV= Group Chief Executive, commented that the previously
booming housing market led many interest-only mortgage holders
to believe the increased equity in their home at the end of the
interest-only period would enable them to repay the mortgage,
adding: “Many of the homeowners we polled appear to have
an over-optimistic outlook on their ability to pay off their mortgage
capital at the end of the term. Or worse still they are turning
a blind eye to the issue.”
A
mortgage expert for Think Money was quick to
warn of the dangers of such an attitude towards interest-only
mortgages. “There are two main ideas behind interest-only
mortgages. Some homeowners simply want to reduce their mortgage
payments in the short term to free up extra funds – after
which normal (but slightly higher) mortgage payments resume.
“Others
choose to go interest-only for the entire mortgage duration –
typically 25 years – in which case the matter of repaying
the remaining mortgage capital requires more in-depth planning.
It would appear that this is an area which many interest-only
mortgage holders have failed to address.
“The
advantage of such long-term interest-only mortgages is that it
allows control – the homeowner is responsible for saving
towards the final mortgage repayment, and they can choose to pay
more or less each month if necessary. But this is something which
requires great discipline, and it also relies on the homeowner’s
finances staying relatively consistent for the duration of the
mortgage.
“The
safest way to run an interest-only mortgage is to agree a capital
repayment plan alongside the mortgage – or, at the very
least, make frequent, substantial deposits into a savings account.
Relying on increased equity or other investments are potentially
risky, and could result in the mortgage holder losing their home
at the end of the interest-only period.”
The
Think Money spokesperson also emphasised the
importance of professional mortgage advice before making any decisions
about mortgages.
“Speaking
to a mortgage adviser who knows the market can ensure that the
homebuyer is well prepared and fully understands what is involved.
That’s especially important with interest-only mortgages,
as it’s a matter of the homeowner’s future financial
security.”
Web
Site: http://www.thinkmoney.com/
Contact
Details: Melanie Taylor
melanie.taylor@thinkmoney.com
0845 056 6480
Pennington
House
Carolina Way
South Langworthy Road
Salford
M50 2ZY
2010
