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Flight to interest-only as payment shock hits

Borrowers are expected to switch to interest-only loans to avoid the worst effects of the payment shock as their fixed deals come to an end.

Mform.co.uk says around 24 per cent of homemovers and first-time buyers take out interest-only loans and believes this figure may rise significantly.

It says the difference in monthly payments on an interest-only basis and a capital and interest basis can be as much as £225 or £2,700 a year on a £150,000 loan.

Marketing and business development director Francis Ghiloni warns that although it may look like the easy option for many people at this time, they could be storing up problems for the future.

He says: “It will be tempt- ing 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 at 6 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 simply be 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 a step.”

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