Rishi Sunak branded 'patronising and out of touch' over interest-only mortgage advice

Rishi Sunak has insisted that raising interest rates again is a crucial component of tackling inflation, but has been branded out-of-touch with the pain faced by average homeowners.

The prime minister said he supported the Bank of England's move on Thursday to increase interest rates – by 0.5% to 5% – to their highest levels since the 2008 financial crash.

While this move may cause a headache for people paying off mortgages, the Sunak urged them to "hold their nerve".

Read more: Martin Lewis praises Jeremy Hunt's mortgage support plan

"Now we have the welfare system, there’s a support for mortgage scheme for people who are particularly vulnerable," he told the BBC's Sunday with Laura Kuenssberg programme.

"But for others they can talk to their bank, they can request and extension to their mortgage, or a switch to an interest-only mortgage.

"None of that will have an impact on their credit rating, and it will save them potentially hundreds of pounds per month on their mortgage payments."

However, Liberal Democrat leader Ed Davey called this "patronising advice" and said it showed how out of touch Sunak is with the pain faced by mortgage-holders.

"Struggling homeowners will be rightly furious after watching an out-of-touch prime minister who has no idea of the pain caused by rising mortgage rates," Davey said.

"Rishi Sunak's patronising advice to struggling families coping with the cost-of-living crisis shows why he is not up to the job. People need help, not a prime minister instructing them to hold their nerve."

Read more: Maybe a house price crash is just what our society needs

Liberal Democrat Treasury spokesperson Sarah Olney MP told Yahoo News: "Rishi Sunak and Jeremy Hunt are completely out of touch with reality if they think this will solve the unfolding mortgage crisis.

"People on the brink of losing their homes or left making heartbreaking decisions need real help. A targeted and effective Mortgage Support Fund will help those families most at risk. Sadly the government is just tinkering around the edges."

Green Party MP Caroline Lucas tweeted: "Total complacency from Sunak on spiralling economic crisis.

"Endlessly repeating we need to 'Hold our nerve – stick to the plan' does *nothing* to help families desperate to know how on earth they'll pay mortgages, rents, bills and shows how out of touch he is."

Watch: Sunak promises everything is 'going to be okay' despite interest rate rise

That's not to say interest-only mortgages don't have their advantages, but there are a number of factors to consider before you sign up to one.

Here, Yahoo News explains what they are and how they work.

What are interest-only mortgages?

Interest-only mortgages require borrowers to pay back interest on the amount they were loaned each month until the mortgage term has ended.

After this, they have to start paying back the actual amount borrowed to buy their house.

This is different to a repayment mortgage where you have to repay both interest and a portion of the loan each month.

Read more: Jeremy Hunt agrees mortgage support measures with banks

Interest-only mortgages usually require you to pay one large lump-sum at the end of your mortgage term, so it's vital to save up throughout this period.

Why is it difficult to get an interest-only mortgage?

As lenders are relying on borrowers to pay back the cost of their loan all in one go at the end of the term, banks often see this as a risky type of loan.

For this reason, lenders will often want borrowers to set up what is known as a repayment vehicle – a method to repay a mortgage, such as an endowment policy, pension, sale of property, or a savings/investment plan.

A few years before the 2008 crash, lenders admitted that they'd lost track of who could repay these debts because they hadn't checked if payments were being made to repayment vehicles during the 1990s, The Guardian reported.

The risk to lenders might explain why interest-only loans are not nearly as common as they were before the housing bubble burst.

What are the risks to borrowers?

While many people – particularly buy-to-let landlords – will benefit from the breathing space granted by low-repayments during their term, there are some potential pitfalls to consider.

As you pay interest on the full amount throughout the process, interest-only mortgages are often more expensive than more widely issued repayment mortgages.

There is also a risk that your repayment vehicle might not perform as well as you expected, leaving you in a difficult position at the end of term that might require you to sell your home.

Read more: Interest rates: When will UK’s mortgage misery end?

Ashton Berkhauer, home services and mortgages expert for MoneySuperMarket, said: "The total amount you owe is not reducing and will have to be paid off at some point in the future – so make sure you have a plan in place.

"Options to pay off the loan could include selling the property, switching to a repayment mortgage, making over-payments, or saving and investing elsewhere.

"Whichever route you choose, make sure you review your plan regularly, so that you know it will cover the amount you need when the time comes."