Interest-only mortgages gain in popularity, lenders cautious

According to recent report from the Council of Mortgage Lenders, interest-only mortgages are becoming popular once again. The number of such loans taken out in 2006 was up by 33 percent to 222,400, the CML says. However MoneyExpert, the consumer website, says that one out of five lenders do not offer interest-only mortgages as an option to borrowers.

In an interest-only mortgage, the borrower pays only the interest on the loan, with the principal due at the end of the loan’s term. At the end of that time, the borrower can either pay off the principal, take out another interest-only mortgage, or convert the loan to an amortizing loan and pay off both interest and principal. In some cases, borrowers take out an endowment policy that is meant to accumulate the money to pay off the principal at the end of the loan. However, mis-selling of the policies and poor stock market performance in the 1990s has made that option less popular.

Recently, lenders have become more cautious about granting interest-only mortgages because of the risks involved and as defaults have increased. But this type of mortgage has begun to increase in popularity again because of the amount of money that borrowers are able to save in payments, calculated by MoneyExpert to be up to around £232 per month.

MoneyExpert’s chief executive is careful to warn, however, that there are, indeed, risks to taking an interest-only mortgage and that borrowers taking this option need to well aware of those risks. On the other hand, he says that the amount of money saved on payments could be the difference between being able to afford a mortgage or not.

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