Interest-only mortgage customers wasting £40,000

24 August 2009 / by Rachael Stiles

Homeowners with interest-only mortgages could save thousands of pounds over the life of their loan if they switched to a repayment mortgage instead.

Market analysis from price comparison website has found that 23 per cent of UK mortgage holders are on interest-only mortgages, despite the scarcity of these types of loans since the onset of the credit crunch.

Interest-only mortgages keep monthly repayments lower, but as interest rates have fallen in the last 12 months, moneysupermarket has calculated that switching to a capital repayment mortgage could save each homeowner up to £40,000.

Some homeowners put off switching their mortgage deal because of the perceived costs this entails, but moneysupermarket says this needn't be the case – if they stay with the same lender, on the same terms, it can cost just £25.

If customers who are currently only paying the interest off their mortgage started repaying the balance, they would see their monthly repayments increase by around £50 a month compared to what they were paying 12 months ago, which could save thousands over the life of a 25 year mortgage.

Hannah Skenfield, mortgage channel manager at, is concerned by the proportion of homeowners with interest-only mortgages, and while she takes encouragement from the fact that lenders have now limited the availability of these loans, she says this might be a case of locking the stable door "after the horse has bolted".

Ms Skenfield says while she understands the temptation of saving on monthly payments by opting not to repay the capital, the borrowers making the most of falling interest rates are those using it as an opportunity to over pay on their mortgages.

"Unfortunately those currently on interest only deals are by the nature of the arrangement not paying off any of their capital and, without the aid of a regularly reviewed repayment vehicle, are setting themselves up for a bill for their full loan at the end of the life of their mortgage," Ms Skenfield warns.

She urges homeowners on interest-only deals that "in most cases you should take action immediately."

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