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The Council of Mortgage Lenders’ figures are showing a growing trend in interest only mortgages. From January to March 2002, 9% of new mortgages were interest only. Now take the period from October to December 2005, and the amount of new interest only mortgages has risen to 23%. In the same timeframe, the number of first time buyers choosing interest only mortgages has increased from 6% to 15%.

There’s a good reason for this upturn, and that’s because the monthly payments are so much lower than with a repayment mortgage. All you have to do is pay the interest, delaying the repayment of the capital itself until the end of the mortgage term when it is paid off in full.

Getting an interest only mortgage is an easy way to avoid having to change lifestyle habits like eating out and holidays – and having a mortgage is incredibly affordable this way. However, we think that there could be a lot of people in trouble in the future when they realise that they didn’t start saving soon enough for this eventual lump sum payment.

The Financial Services Authority (FSA) have voiced concerns about homebuyers potentially getting an interest only mortgage and not making sufficient provisions to pay off the capital, so as a result mortgage lenders have tightened up the rules on interest only mortgages. Now you need to provide proof of an alternative savings fund to cover the capital, before they will agree to lend you the money. The most common ways to save include pensions and ISAs, regular payment schemes that could potentially save more than the capital required. Of course, they may also fall short. The main danger is that the homebuyer will go and cancel the savings plan once the mortgage has been agreed.

If a borrower decides not to save money to cover the capital, the only option would be to sell the home and then buy a home of less value when the time comes to repay the capital. This is not a scenario that the FSA and lenders want to be faced with, especially as property prices cannot be depended on.

Back in the 1970s and 1980s interest only mortgages were very popular – homebuyers would take out an endowment policy to cover the capital repayment at the end of the term. However, we all heard in the news recently about endowment policies under-performing – many borrowers were not able to cover the capital because of an endowment shortfall. They were considered to be a ‘guaranteed’ way of saving, but they did not fulfil their promise. In a similar way, there’s no way to be sure that an investment product will have performed as well as is needed when it comes to paying back the capital in 20 years time.

As people realised that the endowment policies had under-performed, the whole concept of getting an interest only mortgage with a separate savings vehicle fell out of favour, and now repayment mortgages are the norm. But from the recently published statistics mentioned earlier in this article, it looks like the tide may be turning again. For some people it’s the only option. House prices are too high for many people to be able to afford the full repayment mortgage payments.

So it looks like interest only mortgages will be becoming a lot more popular again, but we think that mortgage lenders could do more to help homebuyers see the other options available to them. For example, a mortgage doesn’t have to be over 25 years – the term can be extended to 30 or even 35 years, which would help lower the payments on a repayment mortgage considerably.

A 25-year repayment mortgage of £125,000 at 4.9% will cost £731.69 per month. Stretch the mortgage over 35 years instead, and the monthly payment is £103.53 less at £628.16. That can make the difference between a mortgage being not affordable and affordable.

Many mortgages now offer the option of overpaying when you can. So just because a mortgage is over 35 years, it doesn’t mean it will take 35 years to pay it off. Many homebuyers move house every eight to ten years as well, so the mortgage never needs to run its full course. It’s then a good opportunity to reassess how much you can afford on monthly repayments.

There are other options too, like a mortgage in which you repay half of the capital on repayment, and the rest at the end. It means you get a head start on repaying the capital, and the mortgage can always be renegotiated if you feel you can afford to pay more each month.

Our most serious advice is this – don’t try and make a decision about something as important as a mortgage without getting advice from a professional first. There are a number of solutions so it is always best to get the whole picture from someone who knows the market well.

When applying for a home loan, it can be difficult to ascertain your options and the best deal out there. Mortgage brokers can help you shop for the best loan for your situation.

Mortgage Brokers

A mortgage broker is an independent professional assisting homebuyers with their mortgage needs. Instead of a loan officer for a bank, a mortgage broker typically works with tens or even hundreds of lenders. This independence lets mortgage brokers hunt for loans that fit the credit history and particular lending needs of a person.

Let’s assume you have less than stellar credit when you apply for a loan at ABC Lender. The lender pulls your credit report and determines you don’t qualify for any of the loans offered by the lender. The lender is going to drop you like a rock and move onto the next potential borrower.

Now, let’s make the same assumption regarding your credit score, but put a mortgage broker in the place of a lender. The mortgage broker is going to look at your credit score, income and overall borrowing circumstance. The broker is then going to give you options and a recommendation regarding the best loan for you. Instead of hoping to get financing, you are now in a situation where you are evaluating the best financing options.

Mortgage brokers can help anyone, but are particularly valuable in two circumstances. The two circumstances are bad credit and document overload.

If you have bad credit, even horrible credit, a mortgage broker is going to be able to hunt down loan options. Many people make the mistake of believing bad credit precludes them from getting a loan. It doesn’t. The loan terms may require more points or a higher interest rate, but bad credit doesn’t preclude home ownership.

For some borrowers, the monstrous amount of paperwork required in the loan process can be overwhelming. When you use a mortgage broker, the documentation is all taken over by the broker and his staff. In fact, mortgage brokers have people known as processors on their staff who do nothing but compile, organize and process all the documentation needed for loans. The do this everyday and are masters of the process.

The decision to use a mortgage broker is often a good one. A good broker is going to help you get the best loan while making the actual loan process a lot easier than going it alone.