Lloyds TSB cuts interest-only mortgages as moneysupermarket warns against them

31 October 2008 / by Rachael Stiles
Switching to an interest-only mortgage might cut monthly outgoings but can significantly add to the overall cost of the mortgage, moneysupermarket.com is warning homeowners.

As the credit crunch takes its toll on household finances, stretching budgets to breaking point, some mortgage customers might be tempted to switch to an interest-only payment plan, but moneysupermarket.com says that doing so could add an extra £18,000 to the total cost of the mortgage.

While switching to an interest-only mortgage might seem like an easy way to cut monthly outgoings as the higher cost of borrowing threatens more and more people with repossession, it could prove a costly decision and should only be used as a last resort.

Switching from a repayment mortgage to only paying the interest on the debt can knock as much as £236 off the monthly payments of the average £150,000 mortgage, moneysupermarket.com has calculated, but could end up being an expensive choice in the long term.

Louise Cuming, head of mortgages at moneysupermarket.com, warns that "unless you really can't afford to continue making repayments at the current level it could be a very expensive mistake. People must not be tempted to switch to interest only repayments just to support their current lifestyle and spending habits if there are other luxuries that could be cut first.

"Many families are feeling the pinch, but they should be very careful not to be blindsided by the drama of the recession into underestimating how important it is to keep on top existing financial commitments." she added.

Meanwhile, Lloyds TSB has moved to stop its customers from switching to interest-only mortgage deals, despite its recent commitment to support homeowners where possible as part of an agreement with the Government over its proposed rescue fund.

Borrowers with Lloyds TSB mortgages of high loan to value ratios will no longer be able to pay interest-only on their home loan; only borrowers who owe less than 75 per cent of their home's value will have the option to switch to interest-only.

Lloyds has defended the move, saying that those homeowners which are experiencing difficulty paying their mortgage will still be able to switch to interest-only, and added that the decision is part of a responsible approach to help its customers avoid falling into negative equity.

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