Interest-only mortgages give 'false sense of security'

16 August 2006
According to Julia Harris, a mortgage analyst at Moneyfacts.co.uk, interest-only mortgage products are indicative of the "live for today culture" and can stand in the way of long-term financial security.

Interest-only mortgages provide borrowers with the capital to make a house purchase and only require a repayment of the interest on the sum borrowed at first, making monthly affordability greater.

However, the terms of interest-only mortgages are generally far longer (up to 50-year terms) and borrowers incur higher interest rate charges and will pay more interest over the term of the loan as the outstanding balance will remain for an extended period of time.

"Priority for many is still to get on the property ladder and consumers and lenders are using everyway possible to make this happen," Ms Harris said.

"Lenders are continuingly increasing income multiples and relaxing terms, as reactions to both the economic stability and growth we have seen in the property market and also the ever increasing competition between lenders.

"Although these may all allow the consumers to get themselves on the property ladder, and may well be affordable in the short term, it may also be lulling people into a false sense of security and in the long term things could look very different."

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