Debt danger for interest-only mortgages

Britannia Building Society said that it is to contact its interest-only customers to highlight the danger of only paying the interest and not the capital on their mortgage, warning that they are creating a “potential timebomb”, the Times reports.

Nick Gardner, director of mortgage broker Chase de Vere, welcomed this action, telling the paper: “This is a very welcome move and other lenders should follow suit. Under FSA [Financial Services Authority] rules, mortgage brokers are already obliged to contact interest-only clients to warn them of the dangers of interest only loans, so it makes sense for lenders to do the same.”

Interest-only deals have become popular with those on a tight budget due to the scale of payments they can make compared to regular mortgages as they do not have to repay the capital.

However, Britannia said that only half of its interest-only customers claim to be making provisions to repay the loan, which could cause them to go into severe debt in a financial crisis.

Such is the concern over the repayment of interest-only mortgages that the FSA is now said to be investigating these mortgage types before a financial crisis hits.

If you want to find out more about interest-only mortgages, click here for ClearDebt’s useful guide.

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