‘Extra risk with interest-only deals’
Prospective homebuyers need to think carefully about the different risks associated with an interest-only mortgage before deciding to take one out, it was suggested today.
Monthly payments against an interest-only mortgage are normally significantly lower than those on a repayment mortgage, because the capital does not have to be repaid until the end of the loan term.
A spokesman for the Council of Mortgage Lenders recently suggested that such mortgage products could be very useful for first-time buyers, who could use the money from the reduced monthly payments to help with the cost of furnishing and decorating their new property.
However, David Higgins of independent financial adviser Re-Financial Planning warned that such deals have an "extra dimension of risk" compared to most mortgages because borrowers have to rely on other methods of repaying the capital.
"That risk may be that they're hoping the value of their house increases year upon year, [and] they eventually pay it off when they sell the house, which is a definite risk," he explained
Mr Higgins also advised people holding an existing interest-only deal to look at switching it to a repayment mortgage as soon as they can afford to.
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