With mortgage rates reaching the highest level since the 2008 financial crisis, Britons have been assessing the options available to help make monthly repayments become more manageable.
As part of a range of initiatives launched to support struggling borrowers, many lenders have agreed to allow customers to switch to interest-only payments for six months as long as they’re up-to-date with their payments, without impacting their credit score.
Claire Flynn, a mortgages expert at Confused.com said: “An interest-only mortgage means you only pay back the interest amount each month. This is different to a repayment mortgage which requires you to pay both the interest and some of the loan back each month.
“These are rarely offered for residential homes due to the extra risk involved and are much more commonly used for buy-to-let properties.”
Ms Flyn said the “main benefit” of an interest-only mortgage is lower monthly payments. However, she noted “there are a number of things to consider” before deciding on this option, as it can cost “more in the long run”.
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Less time to repay the loan without extending the term
By switching to an interest-only deal for a while, borrowers won’t be repaying any of the loan amount during this time. This means people will face a shortfall when they return to their regular mortgage payments.
Ms Flynn said: “In order to repay the loan before the end of the term, you either need to opt for higher monthly repayments, overpay the mortgage or clear the remaining debt at the end of the term.”
People may be able to extend the mortgage term, but it will mean they’ll have to pay more in interest overall. Ms Flynn suggested people speak to their lender to find out what the terms are as “it could cost you more in the long run”.
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Returning to high payments might be difficult
Interest-only mortgages are only a temporary measure that lenders have said they may only allow people to switch to for six months. Ms Flynn pointed out that those who get accustomed to budgeting for a smaller amount may find it more challenging to go back to a repayment mortgage when the period ends.
She said: “If you are still struggling to afford the repayments at that time, you should speak to your lender to find out what other support options are available to you.”
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Lenders may have other ways to support
Lenders may also be able to offer support in other ways that may be more appropriate than an interest-only loan.
For example, Ms Flynn said: “They might be able to offer you a part interest part repayment mortgage, or a temporary payment deferral.”
Mortgage lenders have agreed to offer tailored support to customers worried about rising repayments and they can explain the different support options available in detail.
Ms Flynn added: “If you are concerned about your mortgage payments, switching to an interest-only deal might be a temporary solution to help you get your finances in order. Your first step is to speak to your lender so they can help you work out what’s best for you.”
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