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Warning over mortgage switch.

BORROWERS switching to interest-only mortgages as their fixed rate deals come to an end could be taking risks with their finances, warns broker My Mortgage Direct.

Cath Hearnden, My Mortgage Direct director, said: "The double whammy of interest rate rises and the end of low-rate fixed deals has seen mortgage repayments shoot up overnight for many homeowners.

"We are seeing increasing numbers of borrowers who, rather than face reality, are using an interest-only remortgage as a form of defence against the onslaught of rising repayments until the cavalry arrives.

"Switching to interest only soothes their jangled nerves as it deals with the immediate problem of a sudden drop in disposable income until they put plan B into action."

This strategy is often justified by future plans to move house when the equity from the sale will redress the balance or an intention to change to repayment if their income increases. However, the reality is that interest-only repayments become 'normal' and it never seems to be the right time to bite the bullet and go back to paying off capital.

Repayments on a mortgage of pounds 150,000 over 25 years at an old fixed rate of 4.5 per cent for example would have been pounds 833.75. A new rate of 5.5 per cent would cost pounds 921.13. But interest only would take it back down to pounds 687.50.

Ms Hearnden added: "It's easy to see the attractions of the interest only escape route but there are ways of mitigating the effects of rising costs.

"We are advising clients who feel this is a necessary course of action that they could compromise by opting for part interest only and part repayment to keep the repayments the same.

"For example, the same mortgage at 5.5per cent with pounds 100,000 on repayment and pounds 50,000 on interest only would cost pounds 843.25, which is almost the same as they were paying previously."

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Title Annotation:Sport
Publication:Coventry Evening Telegraph (England)
Date:Jul 11, 2007

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