Interest-only can be risky unless borrowers plan ahead, warns mform.co.uk

More mortgage customers will switch to interest-only loans in a bid to avoid the worst effects of the credit crunch payment shock, online mortgage company mform.co.uk predicts.

Currently around 24 per cent of home movers and first-time buyers take out interest-only loans* without specifying a way of paying off the mortgage and the online mortgage company warns that this figure may rise significantly.

The difference in monthly payments on an interest-only basis and a capital and interest basis can be as much as £225.25 or £2,703 a year on a £150,000 loan**, mform.co.uk says.

The Financial Services Authority has highlighted that more than 1.4 million cheap fixed-rate deals are set to end this year with many of these borrowers facing rises in monthly mortgage costs of as much as 40 per cent.

Francis Ghiloni, mform.co.uk's Marketing and Business Development Director, said: "Moving to interest-only repayments on your mortgage will help reduce your monthly costs.

"And it will be tempting for the 1.4 million borrowers whose fixed-rate deals are coming to an end this year. Many of them are on deals as low as 4.23 per cent and with the current average fixed rate of 6.0 per cent they face serious payment shocks.

"However tempting switching from repayment to interest-only may be, unless borrowers have plans in place to eventually repay their loan they may be simply storing up problems for the future. Getting to the end of the mortgage term and still owing the initial debt would be disastrous.

"We would urge anyone contemplating a switch to interest-only to be careful and to research the market to find the best possible deals before taking such as step."

Analysis by mform.co.uk shows 21 per cent of loans advanced in 2006 were on an interest-only basis with borrowers not specifying a repayment method compared to 24 per cent in 2007. In January 2008 around 24.5 per cent were on an interest-only basis.

mform.co.uk offers a unique free service linking mortgage customers directly to the application systems of lenders. It is the only website which allows borrowers to search the whole market for the best products ranked on true cost and to apply directly to lenders.

The service is completely independent and is not influenced by commercial deals or advertisements. There are no distracting sponsored links and borrowers can also research mortgage product features and lenders' service levels.

mform.co.uk works with lenders by enabling them to link with informed mortgage customers and by reducing lenders' costs allows them to pass on savings to customers.

The service, which is free and easy to use, can be found at www.mform.co.uk.

Notes:

* mform.co.uk's analysis of CML figures
** mform.co.uk calculations

For more information:
mform.co.uk: Francis Ghiloni/Gordon Swan 0131 556 4845

Citigate Dewe Rogerson:
Kevan Reilly/Jonathan Henderson on 0207 638 9571

About mform.co.uk

mform.co.uk enables people to simplify the process of choosing a mortgage by identifying the best ones for them based on a range of criteria, including cost and product features such as the ability to make over-payments.

The free service enables consumers to source personalised all-round best buys rather than deals based on headline interest rates or led by sponsorship deals and advertisements. It provides information on the standard of service of lenders' application processes and there are no sponsored links promoting mortgage products.

Jonathan Henderson
Citigate Dewe Rogerson
3 London Wall Buildings
London Wall
London EC2M 5SY

Switchboard: 0207 638 9571
Direct Line: 0207 282 1057
Direct Fax: 0207 282 1042
Email jonathan.henderson@citigatedr.co.uk

For more information see: www.citigatedewerogerson.com