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Worries grow for interest-only mortgages dominated by buy to let investors

Worries grow for interest-only mortgages dominated by buy to let investors

Almost three-quarters of homeowners with interest-only mortgages - many of them buy to let landlords - are worried they may not be able to repay their loan.

Research by mortgage broker Ocean Finance suggests that just 31 per cent of interest- only borrowers questioned said they have a separate investment policy in place, such as an endowment or an ISA, to pay the capital. 

While 16 per cent said they plan to switch to a repayment mortgage before their current loan ends, 31 per cent said they expect to have to sell their home to settle the outstanding capital. 

Interest-only mortgages became popular in the 1990s as a way for consumers to afford homes at a time when property prices were soaring; interest-free mortgages have historically been the choice of borrowing for buy to let investors in particular.

Lenders often agreed interest-only loans without confirming borrowers could repay the capital owing at the end of the mortgage. By the end of 2012 most lenders stopped offering interest-only deals after tightening their lending rules. 

The research shows that just over a fifth of borrowers with interest-only mortgages don’t feel they were given adequate advice about repaying the capital portion of the loan when they took out their mortgage.

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