No Evidence That Interest Only Mortgages Are Taken Out Under Pressure

Amidst concerns that many people may be taking out interest only mortgages rather than capital and interest mortgages simply because of the rising cost of house buying and the problems with affordability, a recent report has been published and has indicated that this is not actually the case, and it is not pressures relating to the affordability of housing in the UK that is resulting in some borrowers opting for the interest only mortgage.

The research was carried out by the Council of Mortgage Lenders in the UK, and shows that those deciding to take an interest only mortgage opt for income multiples that are similar to or lower than those taken by borrowers that go for a capital and interest mortgage, also known as the repayment mortgage. The report also revealed that interest only mortgages are more likely to be taken out by home movers than by first time buyers, despite the fact that the latter group is most likely to suffer the effects of rising property prices.

According to the data, amongst those that find that the interest only mortgage is a viable option are the self employed, as the income for a self employed borrower may not always be steady, and by taking an interest only mortgage the borrower can repay the minimum amount each month thus cutting their monthly outgoings, but can make addition payments on the loan at times when there is a higher level of income available.

The director of the Council of Mortgage Lenders, Michael Coogan, stated: “The view that interest-only mortgages are being used as a dangerous short cut around affordability barriers is not borne out by our research. But we do need to understand as much as we can about why borrowers choose them, and what they do after they have taken out their loan. We are therefore pleased that the Financial Services Authority has been undertaking consumer research, and look forward to reading their findings when they are published next month.”