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Interest only mortgage holders could be in for a shock

Tue, 19 Sep 2006

Taking out an interest only mortgage could be regarded as something of a gamble. Consumers who choose to do so, whether through financial necessity or otherwise, could making themselves vulnerable to a major financial headache if interest rates climb further to six per cent.

Interest rates are forecast to rise again in September, according to most expert analysts. The financial impact upon interest only mortgages could be enormous. The average new mortgage taken out by first-time buyers is approximately £135,000.

Whilst average repayments would climb by what seems to be a small figure, for those borrowers who already pushed income multiples as far as they could, these sums could become very significant. For those lenders who have considerable stakes in the sub-prime market, the next monetary policy committee meeting could prove a harrowing time.

Interest rates climbed from 4.5 per cent to 4.75 per cent earlier this year, already stretching the limits of many borrowers. If rates do rise to an anticipated 6 per cent, the financial consequences for those borrowers (mostly first-time buyers) who are already straining to afford their home loan could prove too much.
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