According to statistics from the Council of Mortgage Lenders, a total of 20,400 interest-only loans for house purchases have been approved this year compared with 31,300 for the same period in 2007.
Mform says its own statistics show that 25.7 per cent of applications through its service were for interest-only loans in the first six months of 2008 compared with 30.4 per cent in 2007.
The firm warns that lenders are becoming stricter on approving interest-only applications as lending criteria are tightened.
Mform says that switching to interest-only can save around £2,400 a year in mortgage payments on a £150,000 loan at seven per cent. On a repayment basis monthly payments would be £1,072.63 compared with £875 on an interest-only basis.
Marketing and business development director Francis Ghiloni says: “Lenders are becoming more cautious about interest-only mortgages because of worries about house prices and our experience is that increasingly borrowers are becoming more cautious too.
“That is not to say that switching to interest-only is necessarily wrong. The worry is when borrowers do not have a method of repaying their loan in place. Coming to the end of the mortgage term and not being able to repay the loan would be disastrous. We would urge anyone contemplating applying for an interest-only mortgage to research the market to find the best possible deals before taking such a step.”