Avoid the Interest Only trap

Published:

29/10/2008

Topic:

Press Release,Money,Mortgages

Switching a mortgage from repayment to interest only can knock up to £236 a month off the monthly payments on a typical £150,000 mortgage...

Times are tough for many borrowers, and as the credit crunch and spiraling cost of living eat into family finances, some consumers might be tempted to switch their mortgage from a repayment to an interest only basis.  Doing so can knock up to £236 a month off the monthly payments on a typical £150,000 mortgage*.

 

However, moneysupermarket.com analysis shows that such a move should be treated as a last resort for those struggling to make ends meet, as it will dramatically increase the overall cost of the mortgage.  In fact, consumers would have to fork out an extra £18k* over the course of their mortgage term if they decided to switch to interest only repayments for the first seven years of the deal, instead of making repayments from the start. They will also see their monthly repayments leap by £408.40** when they do start repaying the capital, which could put a serious dent in monthly budgets.

 

Louise Cuming, head of mortgages at moneysupermarket.com, said: "This might seem like an easy way to free up some extra cash. However, 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."

-         Ends -

*Figures based on £150,000, 25 year mortgage with HSBC as below 

 

Total Amount Paid over 25 Years (Capital & Interest)	Total Amount Paid over 7 Years (Interest Only)	Total Amount Paid over 18 Years (Capital & Interest)	Total Amount Paid over 25 Years	Difference
£276,869.71	£57,645	£237,242.91	£294,887.91	£18,018.20

** Interest only payment £686.25 C&I payment £1094.65 after 7 years.

Sourced by www.moneysupermarket.com 29.10.2008

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