Soaring house prices and a reluctance to cut back on the good life could saddle a generation of borrowers with mortgages they cannot pay off. There has been a steady rise in the number of interest-only mortgages not backed by some means of repaying the capital. They are cheaper because borrowers are not chipping away at the amount they borrowed.

In the first quarter of 2002, nine per cent of home loans had no means of capital repayment, according to the Council of Mortgage Lenders. By the last quarter of 2005, that figure had risen to 23%. Among first-time buyers, it rose from 6% to 15%.

Inustry commentators say rising house prices have put the squeeze on borrowers. People are not always willing to compromise their lifestyles when buying houses and they still want regular holidays and lots of nights out.

They also want the cheapest mortgages they can get, which means interest only loans, and they don't always bother looking at repayment issues. But if they continue to rely on these loans for too long, the danger is that they will reach retirement with a mortgage outstanding, no way to repay the debt and facing the real risk of being forced to sell their homes.

Patterns of borrowing have changed dramatically. About 20 years ago, an interest-only loan was the norm - backed by an endowment policy designed to clear the outstanding mortgage on maturity.

But as endowments fell out of favour because of poor maturity values, more borrowers switched to repayment loans - also called capital and interest - as they made certain that the mortgage would be cleared.

At the start of 2002, for example, almost 90% of first-time buyers chose a repayment loan. But the pendulum is swinging back as rising house prices mean omebuyers push themselves to the limit. A quarter of loans to first-time buyers are now interest-only.

Others suggest that some buyers feel that interest-only is the only way they can make their mortgage affordable. Our job is to highlight the other options open to them. One way is to take out a repayment loan but stretch the term to 30 or 35 years instead of the usual 25 years. At least, it means the debt is starting to be cleared and we would always hope that we can reduce the term again when it comes to remortgage in future.

For example, a buyer borrowing £130,000 at a competitive 4.9 per cent and repaying over 25 years would face a monthly repayment of £760.96. If the loan was stretched to 35 years, that drops to £653.28. But there are other options. Brokers are finding some success with the idea of a part-andpart loan, where some of the mortgage is arranged as an interest-only loan and some on a repayment basis. At least it means that borrowers can see the amount they owe depleting.

Copyright © 2005 First Mortgage Trust