Interest is a dirty word for borrowers. Interest-only, however, is sounding increasingly attractive to property hunters, writes Laura Slattery

With an interest-only mortgage, repayments consist of the interest due with no dent being made in the capital balance until the end of the loan, or until the end of the period the lender allows only the interest to be repaid. At some point, however, the capital must be repaid.

In recent years, interest-only mortgages were usually only popular with buy-to-let investors, who were swayed by its tax-efficiency. Mortgage interest can be offset against rental income. But on a traditional repayment (annuity) mortgage, the interest portion of a monthly repayment declines in line with the balance, meaning less can be offset.

Investors are still in love with interest-only, with about 90 per cent estimated to opt for it. These buyers hope that, as property prices continue to rise, they can sell up, repay the capital and pocket the profit. But in the last six months, an increasing number of first-time buyers sought and secured interest-only mortgages, according to Mr Trevor Grant, managing director of Mortgage Business Solutions.

Mr Grant attributes this to the further, persistent rises in house prices, which are elevating repayments on straightforward mortgages to a point beyond the budget of most. Interest-only mortgages are a way to keep the initial repayments down. "It's a bit like a low-start option," says Mr Grant.

Generally it is not a good idea for first-time buyers to stay on interest-only for too long, he adds. Their direct debits to their lender may be nice and low initially, but if they start off paying back just the interest, they will either have to make higher repayments for the rest of the term or extend their term out further.

If they stay on interest-only for the full term, they face having to pay off the capital in one big lump sum. Unless they have set up a special-purpose pension or investment plan, they may not have any way of repaying other than selling the property. As first-time buyers typically trade up, most revert to a standard capital-plus-interest repayment after a maximum of three years.

Another trend is for borrowers to use any work bonuses they receive to make lump-sum repayments. This is a way of "catching up" on their mortgage, according to Mr Grant, "as long as you have the discipline to do that".

According to Providence Finance Services, the interest-only option is attractive to young professionals whose earnings increase with experience and promotion, media/artist types who earn large lump sums from time to time, and cash-strapped individuals who want to reduce their monthly outlays to manageable proportions at the start of their mortgage term.

Not all lenders are happy advancing interest-only loans to first-timers. Those who do may limit the interest-only option to three years or restrict it to people whose mortgage is less than a 75 per cent loan-to-value (LTV, or the amount of the mortgage in relation to the purchase price).

Although they may not officially offer such products, some lenders' arms are now being more easily twisted. Many will consider interest-only loans on a case-by-case basis, depending on the LTV and borrowers' incomes.