Interest-only mortgage warning

Borrowers on interest-only mortgages should reduce their loan quickly following Bank of England warnings of a miserable economic outlook.

Yesterday's announcement by the Bank predicting credit conditions are set to tighten will come as yet another blow to struggling first-time buyers, eager to get on the property ladder.

But finance website Fool.co.uk warns those who have already taken out interest-only mortgages in a desperate bid to secure their first property might face tougher times unless they start overpaying.

David Kuo, head of personal finance for the website, said: "In future lenders may tighten the credit-scoring criteria and choose to reduce the maximum loan-to-value (LTV).

"This will put borrowers who have taken out 90 per cent mortgages at risk, especially if the value of their homes decline sharply when they remortgage."

Fool said most lenders will allow borrowers – even those on interest-only deals – to make overpayments. According to its calculations every £1,000 overpayment will reduce the outstanding loan by the same amount but slash the interest bill by £1,500 over 25 years.

More than one in four mortgages taken out in 2006 were interest-only, according to Fool. This was double the number taken out in 2002. Numbers of first-time buyers taking out repayment mortgages fell from 88 per cent in 2002 to 67 per cent in 2006.

Mr Kuo added: "The Bank of England's inflation report should set alarms ringing in the ears of vulnerable first-time buyers.

"Borrowers can choose to hit the snooze button if they wish. But a better idea is to get going and take action now before they get kicked out of bed by their lenders."