More bury heads in interest-only mortgages

By Ian Cowie, Personal Finance Editor
Last Updated: 1:16am BST 12/04/2008

One in three mortgages is now being taken out "on the never never" and interest-only home loans have doubled in popularity during the last five years, The Daily Telegraph can reveal.

The financial crisis in full

But mortgage brokers say lenders are becoming nervous about the high and rising proportion of advances being made to borrowers who have no apparent means of repaying their debts, unlike traditional repayment mortgages which reduce the principal outstanding each month.

Adrian Coles, director general of the Building Societies Association (BSA), said: "It's a sign of the pressure on buyers to afford high house prices and their desire to minimise monthly costs."

On the average mortgage of £150,000, the cost difference between a repayment and an interest-only mortgage would by around £250 a month.

BSA figures show that 33pc of all new mortgages are now advanced on an interest-only basis, compared to only 13pc five years ago.

Mr Coles added: "Clearly, there is an issue that each interest-only borrower will have to face eventually about how they are going to repay the capital. With choppier waters for the economy ahead, lenders will be most concerned that interest payments can be sustained - but it's up to individual borrowers to ensure they can manage the mortgages they have taken out."

Melanie Bien of mortgage brokers Savills Private Finance said: "Things are getting tougher and, while rising numbers of borrowers are putting this to the back of their minds and saying 25 years is a long way off, lenders are beginning to review this issue.

For example, when considering how much they are willing to advance to homebuyers, lenders are increasingly moving away from simple income multiples and instead considering a wide variety of factors to assess affordability.

"HBOS, which includes Halifax, Britain's biggest mortgage lender, Cheltenham & Gloucester, the LLoyds TSB subsidiary, and Nationwide, Britain's biggest building society are examples of this trend.

Now West Bromwich Building Society is the latest to say it will work out affordability on interest-only loans as if they were repayment mortgages."

Abbey, Britain's second-biggest mortgage lender, is reviewing its interest-only mortgage activities. The Bank of England set out to ease the credit crisis by cutting base rates from 5.25pc to 5pc on Thursday and the biggest mortgage lenders said they would cut their standard variable rates from May 1.