However homeowners choosing to only pay the interest on their home loan can save up to £2,860 a year in repayments on a typical mortgage, according to analysis by the independent financial comparison service.
And interest–only mortgages are increasingly popular - Council of Mortgage Lenders’ figures show the number of interest-only mortgages rose 33 per cent last year to 222,400 despite worries about borrowers banking on house price rises to allow them to pay off their loans.
And MoneyExpert.com research reveals around 18 per cent of the 115 mortgage lenders on the market will not lend to customers unless they have a repayment scheme in place.
The attractions of interest-only loans though are obvious – on a £150,000 mortgage at the average two-year discount rate of 5.68 per cent borrowers are saving £248.30 in monthly payments. On a 25-year term borrowers pay £710 a month if the mortgage is interest-only and £948.30 a month if it is on a repayment basis.
Sean Gardner, chief executive of MoneyExpert.com, said: “Lenders are cautious about the rise in interest-only mortgages and those who do offer interest-only loans take precautions such as limiting loan to value ratios to 75 per cent.
“Lenders also ask borrowers about how they plan to repay the loan as FSA regulation means they have to ensure customers are fully informed about the risks.
“There are risks involved in taking out an interest-only mortgage. To some extent borrowers are taking a punt on house prices continuing to rise and being able to repay their loan by downsizing or receiving a windfall.
“However as long as borrowers are aware of the risks then it can make financial sense to opt for an interest-only loan as the monthly savings are significant and can make the difference in being able to afford a mortgage.”
