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The interest only mortgage - saviour or curse?.
An interest only mortgage may keep you in your home today. But government plans are fraught with dangers that will only become apparent decades from now....
The UK Government wants lenders to take all steps possible to help people stay in their homes. It expects them to exhaust all avenues possible before resorting to court action and repossession. Amongst the ideas mooted have been moving people onto interest only mortgages. In theory this reduces the monthly repayment because the borrower doesn't repay any of the loan capital (the money borrowed to buy the house), only the interest on it.
Unfortunately this reflects the government's short-termist view. It may get people out of trouble today, but will build up problems for the future.
With an interest only mortgage the capital is not being repaid. That means that when you borrow 100,000 pounds to buy a house with a 25 year mortgage you will still owe the mortgage company 100,000 pounds 25 years from now. To repay that amount you will need to do one of two things - try and get another mortgage or invest money now in some sort of investment vehicle that you hope will give you 100,000 a quarter of a century from now.
Interest only mortgages have already been party to one financial scandal. In the 1990s Independent Financial Advisers (IFAs) appeared keen to recommend them alongside endowment policies. The theory was the endowment would give you a return much greater than the money you would owe on your mortgage. The practice was quite different, resulting in many people being left thousands, sometimes tens of thousands, of pounds short. It prompted a review with investment companies being required to proactively write to consumers and pay out millions in compensation.
They may seem attractive for getting over the current hump, but again problems can mount. Even assuming you're a sensible person and decide to get back to a repayment mortgage as soon as you are able you will have wasted months or years of money. Your monthly repayment has not reduced your debt and so you will be faced with starting from scratch.
Even if the interest only option is available it may not be accessible. The Financial Services Authority requires mortgage advisers to consider whether the mortgage is suitable. That will include looking at the ability to repay the capital when the mortgage comes to an end. The very people the government wants to help may be beyond help because of its own - sensible - regulation.
The idea of moving those in trouble onto interest only mortgages may be well intentioned. Unfortunately it is poorly thought out and will simply create a new wave of problems as the true financial impact of such a move is felt by those it was intended to help.  Ross Hall is The Smoke's webmaster and editor. In real life he's a Compliance Officer and sometimes photographer.
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Published on Sunday, 16 November 2008
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