Repossession risk of interest-only mortgages

With interest rates rising, many people are thought to be taking out loans just to pay the interest on their mortgage, meaning that they could be setting themselves up for repossession if they hit a financial crisis.

“Consumers can soon become comfortable with the lower monthly repayments, but unless careful future planning and budgeting is used, they may find they can’t afford to pay off the loan by the end of the term, leading possibly to mortgage defaults and ultimately in the worst-case scenario, repossession,” said Julia Harris, mortgage analyst at Moneyfacts.co.uk.

“The jump from interest-only to capital repayment can be huge.”

Her warning comes after Council for Mortgage Lenders data showed last week that repossessions and arrears are at their highest rate in five years.

Ms Harris warned that monthly payments on a 25-year, £150,000 mortgage would shoot up from £625 to £1,186 if the mortgage-holder waits ten years before deciding to start repaying the cost of the original loan rather than just the interest.

She urged homeowners to budget for a change in circumstances and house prices in the future or else face the risk of repossession.

If you want to find out more about interest-only mortgages, click here