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Director Stavros Theophilou comments on interest only mortgages, and explores the potential risks and benefits to borrowers.

Stavros’ comments were published in The i Paper, 17 August 2023, and can be found here.

“Often interest only mortgages can be attractive to borrowers, with lower monthly payments the obvious advantages, as the borrower is only paying interest which may make buying the asset more affordable. Additionally, there is increased flexibility to allocate finances towards other investments or expenses. 

“As with any mortgage, there are risks. As the borrower is not paying down the principal loan amount, the overall interest costs will be higher over the life of the loan compared to a traditional mortgage. Moreover, when the interest only period expires, or the terms are varied to a capital repayment loan, the monthly payments will increase significantly and this can often lead to payment shock if the borrower is not prepared for the higher payments. 

“Finally, if the value of the asset decreases and the borrower is not paying down the principal loan, there is a much higher risk of owing more on the mortgage than the asset is worth, meaning the potential for negative equity is rife.”