Recent statistics released by the FSA indicate that the housing market is really not faring as well as it appears to be on the surface. The whole problem resides in something termed an ‘interest only loan’ and these are not always in the best interest of the consumer, especially in the long run.
This particular type of loan enables homeowners to purchase a home but only pay the interest for a set period of time. At the end of the term, when the loan matures, they still owe the entire amount which was borrowed to purchase the house.
An example given by the Daily Mail stated that a mortgage loan totalling £150,000 would have monthly repayments of £625 of the interest rate was 5% for a 25year term when paying interest only. Yet if using the conventional capital repayment loans, those monthly repayments would total £877.
It may sound like a good deal, but the FSA urges consumers to think twice about taking on this type of loan for the long term. At the end of the day with an interest only loan, the whole capital amount of £150,000 would still be payable and the sad part is, it would all be due immediately.
As many as 314,000 homeowners have missed at least one or two repayments which places them near to being in forbearance, if not already there. An interest only loan may forestall repossession but it is not a long term solution.
Homeowners are being asked to look carefully at their loans, especially if they are interest only mortgage loans because rates are due to rise again 1 May. It is true that mortgage rates fell to a three year low in October of last year, but they have been steadily rising ever since.
Interest only loans, according to a member of the Treasury Select Committee, Andrew Leadsom are only storing problems away for a later date. They may sound like a good deal now by allowing smaller repayments, but they present real problems for the future.