With the average house price rocketing more than 40 per cent in the last four years, demand for interest-only mortgages among first-time buyers has soared.
But consumers are being warned of the pitfalls of taking out these products.
Research by Cheshire-based moneysupermarket.com reveals that between 2002 and 2005 the number of interest-only mortgages taken out by first-time buyers doubled as many regarded it as the only way to get a foot on the property ladder
But some are neglecting to set up additional savings vehicles to offset the overall debt, which could have disastrous consequences if the market stagnates or falls.
Growth
Moneysupermarket.com claims that relying on house-price growth to fund a mortgage can add in some cases é12,000 to the long-term cost of a mortgage, when compared with a repayment option.
It uses the example of a 25-year, é150,575 Co-Op Bank tracker mortgage at 4.99 per cent. The monthly payment for the first five years on interest only would be é627.80. Switching to repayment after the five years means monthly payments increase to é995.53 é an increase of more than é350.
Had the mortgage been based on repayment from the start, monthly payments would have been é881.70 throughout.
Louise Cuming, head of mortgages at moneysupermarket.com, says: éPeople should only consider this type of mortgage if they are sure they will be disciplined enough to save money elsewhere.é
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