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You might be very happy residing on your lender's interest-only mortgage deal right now – but could your cheap mortgage hurt you in the long run?

Research from moneysupermarket.com indicates that 23% of mortgage holders are currently only paying off the interest on their mortgage. But these borrowers would surely be better off with a deal that helps them reduce their debt – in fact the web site's analysis shows the move to capital repayment with your current lender on the same terms will only cost around £25 and current interest only borrowers will see their monthly repayment increase by around £50 per month more than they were paying 12 months ago. Over the 300-month life of the mortgage, this switch could save approximately £40,000.

Hannah Skenfield, mortgage channel manager at moneysupermarket.com, says: "It is encouraging to see lenders restricting access to interest-only mortgages, but this might be a case of after the horse has bolted. Our research finding that 23% of mortgage holders are still only repaying interest on their mortgage debt is deeply concerning.

"The fall in the base rate has meant that many people on tracker and variable rate mortgages have seen their repayments plummet, but whilst the initial monthly saving may seem attractive the borrowers really taking best advantage of low rates are those using the opportunity to repay more of the outstanding debt on their home.

"Unfortunately those currently on interest only deals are by the nature of the arrangement not paying off any of their capital and, without the aid of a regularly reviewed repayment vehicle, are setting themselves up for a bill for their full at the end of the life of their mortgage."

If you are currently locked into an interest only deal the fee for switching to capital repayments with the existing lender is usually only about £25, and so in most cases you should take action immediately. Talk to your mortgage adviser about what you need to do to start paying off your debts now for savings in the future.

SOURCE: Moneysupermarket.com, 21/08/09

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