Switching from interest-only mortgages

During the 1980s the interest-only mortgage became a popular way to borrow for a home. This has changed in the last few years, however, thanks to the poor performance of endowment polices and other investments.

Interest-only mortgages have now been passed in the popularity stakes by repayment mortgages, where borrowers know for sure that they will pay back the loan if they keep up the payments.

With an interest-only mortgage, a homebuyer would borrow the money for the house and pay interest on the loan.

However, instead of paying back a small amount of the mortgage every month as under a repayment loan, they would pay money into an investment product designed to pay-off the mortgage at the end of the loan period.

Falling short

The investment element would take the form of an endowment, individual savings account (ISA) or even a pension.

During the 1980s and early 1990s, many people were sold on the idea of interest-only deals.

Salespeople talked up the performance of endowments because, in many cases, they earned a higher rate of commission.

As stock market indices fell after March 2000, the value of these investments suffered.

The result is that many homeowners now run the risk of not being able to pay-off their mortgage at the end of the loan term.

Talk to your lender

The poor performance of endowment backed mortgages has led many homeowners to consider switching to a repayment mortgage.

Depending on individual circumstances, it is worth talking to your lender to find out what options are available if you switch. Many will arrange this without a huge penalty.

The transfer cost varies from lender to lender but averages at about £50.

Some mortgages include a redemption fee which is designed to stop people changing policy.

Many providers insist on the fee being paid if you remortgage or change from one type of policy to another.

If you are offered a cash-back deal when you first take out the policy, remember that these payments may have to be repaid if you redeem the mortgage early.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.