Debt charities have warned that millions of ‘interest only’ borrowers could struggle to keep up their mortgage repayments if interest rates were to rise. Even a small increase in interest rates could push many households over the edge, warn debt experts.
Rise in number of interest only mortgages over recent years
During the last few years, many home loans were sold on an ‘interest only’ basis with 31 per cent of
all new mortgages in 2006 arranged on this basis. This means that millions of borrowers have deals
which only require them to pay the interest on their home loan, meaning that the capital balance of
the mortgage never decreases.
Now, possible interest rate rises could hit borrowers hard. Una Farrell from the Consumer Credit
Counselling Service said: “Those on interest-only mortgages are more likely to be on lower incomes,
reflecting the relatively smaller monthly mortgage payments required, and therefore are less able to
withstand these budget pressures.
“Interest-only borrowers who are in essence gambling on future house price rises to pay off their
mortgages could be in for a big shock, particularly those living outside London and the South East.”
Interest rate rises will result in steep payment hikes
The Independent reports that on a £100,000 mortgage, an increase of 1 percentage point would
boost monthly payments by £83 whilst a rise of 2 percentage points would mean payments rose by
£166.
David Black, banking analyst for Defaqto, said: “If you have an interest-only mortgage, it is important
that you adequately fund a suitable repayment vehicle, such as an individual savings account. You
should also review it regularly – and adjust the amount that you are saving if necessary – to ensure
that it remains on track to pay off the mortgage at the end of the mortgage term.
“No one knows when and how quickly the bank base rate will increase and many borrowers with
variable rate mortgages, and indeed those with an impending maturing fixed-rate mortgages, could
be in for a nasty financial shock when their monthly mortgage payment is increased.”
