Network Encourages Borrowers To Switch Their Loans To Repayment Basis
Most people will be aware that there are two basic types of home owner loan or mortgage, interest only and repayment (capital and interest).
Although the interest only option may be the more attractive for borrowers in the short term, due to lower loan repayments, a repayment vehicle of some kind is required to repay the loan at the end of the term. In the meantime, interest is being paid on the full balance of the loan right up to the maturity date, thereby increasing the cost significantly over the full term.
One intermediary and loan broker network, Openwork, is now targeting its customers who currently have an interest only home owner loan in an attempt to encourage them to switch to a repayment loan.
The network has negotiated an agreement with lenders whereby a loan customer will not be charged an administration fee for switching their loan to a repayment basis from an interest only loan. This will apply to borrowers whose loan is with Nationwide, C&G, Halifax, Scottish Widows, Lloyds TSB and the Woolwich.
Somewhere in the region of 20 per cent of all home owner loans and mortgage have been taken out on an interest only basis, according to Openwork.
Figures from the Financial Services Authority (FSA) show that a large proportion of borrowers with an interest only loan, do not have any repayment vehicle in place and would therefore have no way of repaying the loan at its maturity date.
Paul Shearman of Openwork said “This is a huge concern for borrowers and lenders alike.”
“A £100,000 mortgage at 5.49 per cent over 25 years would cost £457.50 per month on an interest only basis and £620.64 per month on a capital repayment basis. But the true cost of the interest only mortgage is a staggering £51,000 more expensive over the full term of the mortgage.”
