Interest-only mortgages

Homeowners who choose these deals repay only the interest on their loan without making a dent in the capital. More and more borrowers are choosing this option. The advantage is clear: interest-only deals are cheaper than repayment loans, so borrowers have more cash left in their pocket each month. The monthly cost of a repayment mortgage (repaying capital as well as interest) on a £250,000 loan fixed at 5.5 per cent is £1,535. Interest-only payments are nearly £400 cheaper at £1,145 a month.

But choosing an interest-only deal is risky. When the mortgage term is over, borrowers must either be able to stump up the outstanding capital sum from other investments, or rely on selling their home for at least as much as they borrowed, if they are to avoid a shortfall.

Offset mortgages

Related Internet Links

• An essential guide for first-time buyers

BACKGROUND

• Getting on the property ladder: DIY approach

• Affordable first-time buyer homes

• New homes offer a first step on the housing ladder

Ten things you need to know about... buying your first home

Soaring property prices have made it difficult for first-time buyers to get onto the property ladder. But a slower market could provide new opportunities: find out how to make the most of them

• A step-by-step guide to buying your first home

Related Internet Links

• First-time buyer special

• Property guides

First-time buyers are deserting property market

According to figures, first-time buyers are leaving the property market, with numbers falling by a fifth in the past six months

• Where there’s the will there could be a way

• First time buyers risk negative equity

BACKGROUND

• How to get onto the property ladder

• Useful websites for first-time buyers

• Rise in buyers borrowing five times their income

• Where there’s the will there could be a way

BACKGROUND

• We need more homes

• Grab a home in Tuscany

• Furnished with brainpower

• Auction stations

BACKGROUND

• The home town exiles

• Affordable first-time buyer homes

• First-time buyers face highest mortgage costs in 15 years

• Useful websites for first-time buyers

BACKGROUND

• A problem shared is a problem solved

• Beware of bidding for bargains

• Step on to the property ladder

• Young home-buyers forced into record debt

BACKGROUND

• Wimpey to fight for first-time buyers

• Chic and cheerful

• First rung

• Beware of giving it 110 per cent with your loan

BACKGROUND

• Keep it in the family

• How do I get in?

• The rise of parent power

• Pester power

Offset mortgages allow borrowers to use their savings and current account to offset the cost of their home loan. Instead of receiving interest on their savings and current account, borrowers can save on the interest they would pay on their home loan. A couple with a £200,000 home loan on a £250,000 house will pay £1,245.14 a month on Intelligent Finance’s Offset 90 mortgage. This is costlier than the current best buy fixed-rate home loan deal of 5 per cent, which would mean monthly payments of £1,169. But by taking into account the couple’s savings of £20,000, a further £3,000 in tax-free savings and a monthly deposit of £4,000 a month into their current account with IF, they can shave more than £60,000 off the interest and repay the loan 4 years and 9 months early. But offset mortgages are only really worthwhile for those with savings, and people now save only half as much as they did ten years ago.

Extending the mortgage term

One way to cut the cost of repayments is to exend the loan term from 25 to 30 or even 50 years. Extend the term of a £200,000 loan at 5 per cent from 25 to 30 years and the repayments fall from £1,169 to £1,073, saving more than £1,000 a year. But while the repayments fall, borrowers have to pay interest for an extra five years — which will add thousands to the total cost. The total amount that a borrower will repay on the 25-year deal is £350,754. Extending the term by five years will add about £36,000 to this. Mortgage brokers advise keeping mortgage terms as short as possible.

Times recommends

• Second homes: credit crunch casualty or money-spinner?
• How I built my own sliding house
• Top 10 incentives for house buyers