Interest only mortgages being affected by price falls

The house price falls that have been ongoing for over twelve months have had many adverse effects, and according to recent reports these price falls could result in real problems for those that have interest only mortgages. These are mortgages where the monthly repayments are all put towards the interest owed on the loan with the actual loan balance remaining the same until the end of the mortgage term, at which point it needs to be paid off.

Industry officials have expressed concern that many people that have these interest only mortgages, which became popular because the monthly repayment was not as high as with a repayment mortgages, have not been able to put any money aside in a sideline investment in order to save money towards paying of the actual loan balance at the end of the mortgage loan term.

This was because many of these borrowers had other plans to repay the balance at the end of the term, and had therefore not bothered to put money into any other investment to try and repay their loans.

According to Liverpool Victoria, which carried out the research, many of these that have these interest only mortgages had seen the value of their homes rocket over the past decade, and because of this many had decided that they would simply use the equity from their homes to repay the loan at the end of the mortgage term. However, this has now become a problem because house prices and equity levels have been falling for over a year, which many had not expected.

One industry official said: ‘A previously booming property market led many people to bank on being able to sell their home, use the proceeds to pay off the mortgage and still have enough left to buy another home. ‘However this strategy may have been overturned by current and predicted future falls in property prices.’

Tags: Loans, interest only mortgages, money, house prices, official, property, Financial services, actual loan balance