Mform.co.uk have predicted financial disaster for homeowners who have switched to interest only mortgages, as the global credit crunch grips the loans market.

By changing loans to one where only the interest on the original advance is paid in an attempt to find a cheaper option, Mform.co.uk warn these people are simply putting off problems they will face in the future.

With regards to a repayment mortgage, the borrower would repay £299,601 in total over the 25 years but would then own the property outright when the deal ends.

The report released by Mform.co.uk revealed that although customers who have an interest only mortgage are advised to invest money separately so they are eventually in a position to pay off their debts, very few fail to do so.

As the housing market buckles under the pressures of the credit crisis, Bank of England policy maker, Kate Baker warned that many residents of the UK would find it increasingly harder to buy property even if houses prices were to fall before then end of the year. She said, “We may see prices adjust downwards but there is no clear evidence that affordability will improve. Mortgages, particularly for first time buyers, have become more difficult to get as a result of the credit crunch.”

The numbers of mortgage approvals have dropped to their lowest levels for 10 years which has coincided with a wane in housing prices and the fact that banks are no longer able to gain access to cheap cash. These constraints have added to the problem of first time buyers be able to afford to buy homes.

Mform.co.uk spokesman Francis Ghiloni warned, “It is tempting to switch from repayment to interest only mortgages, but unless borrowers have plans in place to eventually repay their loan, they may be simply storing up problems for the future. Getting to the end of the mortgage term and still owing the initial debt would be disastrous.”

The Council of Mortgage Lenders (CML) have claimed that banks are struggling to meet the demands of mortgage borrowers, revealing figures that £24 billion was advanced during February 2008, which is seven per cent down on the previous month. They claim this number is also six per cent for the same month the previous year.

Further figures released by the CML reveal that almost 30 per cent of first time buyers took out interest only mortgages in January 2008; six years ago just 10 per cent of borrowers did the same.

Mortgage broker David Hollingworth of London and Country warned, “Although interest only mortgages were a way of people getting on to the property ladder, borrowers should switch to a repayment mortgage as soon as they are in a position to afford it. Otherwise, they will get to a point where they have a huge mortgage with no means of repaying it other than selling their home.”