As the cost of living in the UK continues to rise at a dramatic rate and the effects of the credit crunch and general economic slow down continue to eat into household budgets, making money extremely tight for a large number of home owners and people with mortgages and other loans, it seems only natural that many individuals are looking to their finances to see where they are able to cut back on their monthly expenditure and continue to be able to make ends meet each month.

Many people in this situation see an obvious saving in switching their mortgage loan to an interest only basis rather than keeping it on a full repayment loan. A mortgage is usually an individual’s largest single monthly outgoing and it can be quite tempting to reduce the repayments by switching to an interest only loan.

On a typical mortgage of £150,000 the difference in the monthly repayments between repayment and interest only can be in the region of between £200 and £250 per month and although this may appear to be a great way to save money, it will end up costing significantly more over the long term.

Research from Moneysupermarket.com has calculated the long term cost of an interest only loan switch and has estimated that by paying interest only on your loan for a seven year period, could cost an extra £18,000 over the term of the loan, as interest will be charged on a larger sum of money for a much longer period. Once repayments have restarted on this basis, it could cost around an additional £400 per month to catch up on the loan and repay it over the original term.

Anyone who may be considering this option as a cost saving measure, should think very carefully about the long term effects of this course of action before they do it. They should look to other areas in their monthly outgoings first, such as luxury items and consider switching their mortgage loan to an interest only basis as an absolute last resort.