Taking an interest in the future?

In June this year 29% of first-time buyers took their first steps onto the housing ladder using an interest-only mortgage, according to the latest figures from the Council of Mortgage Lenders (CML). While it is understandable that first-timers will try to cut costs wherever they can, if they have no strategy to repay the capital of the loan, they could be storing up some serious trouble for the future.

The risks of staying interest-only

An interest-only mortgage does what it says on the tin. You will repay just the interest of the loan, so the actual debt stays the same. CML statistics show that, of the 29% of first-time buyers in June taking out an interest-only mortgage, only 8% had a specified repayment vehicle in place. That said this doesn't necessarily mean that the remaining 21% have no repayment vehicle in place - it's just not formally known to the lender.

For buyers who have not organised a repayment plan, at the end of the term, you will either have to take a further mortgage which you may or may not qualify for by then or sell your home to repay the lender the capital. You may have some equity but as this means house prices have gone up, it wont be sufficient to buy another home. And if house prices have gone down, and your property is worth less than you are required to pay up, you could lose your home and owe money as well! Not a nice position to find yourself in when you reach your mature years.

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First-timers undeterred but desperate

Despite the risks the number of first-timers opting for this kind of loan is increasing year on year. In June 2004 for example, only 5,000 first-time buyers took out interest-only mortgages compared to more than 10,000 today. However, sensibly around 90% of first-time buyers are on a fixed rate mortgage, says the CML, which provides the opportunity to shelter against interest rate rises, in turn presenting a greater level of security.

It's not surprising that first-time buyers are taking desperate measures to get on the housing market. In July the average price of a property in the UK was £184,270, according to Nationwide Building Society. And with mortgages available at up to five times a single income or beyond, for some, interest-only is the only way they can afford to buy. The average amount borrowed by a first-time buyer at June this year was £118,300, says the CML, which, when considering average income is £23,250, is a hefty sum.

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24 August 2007 © Moneyextra.com

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