Interest-only mortgages

Journalist: Anna Sagar, Mortgage Solutions / Specialist Lending Solutions

ended 24. May 2022

Looking to speak to mortgage brokers about interest-only mortgages.

  1. Do you expect the proportion of interest-only mortgages to continue to fall? 
  2. Are there any circumstances where you would recommend an interest-only mortgage? 
  3. Do you think there is still a place for interest-only mortgages?

5 responses from the Newspage community

Residential interest-only mortgages aren't a great idea for most people, and there are thousands of people still sitting on interest-only mortgages without the capital to repay them. Over the next few years, we will see a significant rise in remortgaging for that demographic that took out mortgages in the late 90s. Interest-only approvals will continue to fall due to the strict lending policy accompanying them. That said, there are circumstances where interest-only is appropriate - mainly in the buy-to-let space where a landlord wants to be cashflow positive quickly and is more interested in investment yield than repaying the capital borrowed; however, there does need to be some strategy as to how you repay these loans and for landlords, it's predicted on property prices rising over time and selling the subject property hopefully for a profit to clear the balance of the debt.
Whilst the interest-only mortgage market is a small proportion of the total number of residential mortgages we see being done, it is still the right advice for some people in certain scenarios, so it would be wrong for it to disappear as a choice. I've done a couple of interest-only mortgages recently, in both cases my clients are buying second residential properties (one for their adult child and the other is a holiday home for their own use) and in both cases the clients do not intend to keep these properties forever, so an interest only mortgage makes sense to keep payments affordable. They are something that I think you should always take advice on, as an interest only mortgage is the crack cocaine of the mortgage world; once you are used to paying £400 per month it is very hard to move to the £650pm full repayment option a few years later. Having a clear reason for why interest only is the correct solution and having had a robust and detailed conversation about how it is going to ultimatly be reapid, is key.
Do you expect the proportion of interest-only mortgages to continue to fall? The demand for residential interest-only mortgages has pretty much fallen off a cliff, especially with the number of people who have been caught short with no means to repay the debt on their main home. Are there any circumstances where you would recommend an interest-only mortgage? I personally would not as I typically deal with first time buyers purchasing a residence but for buy to let mortgages interest only is common place as most will look to sell the property to clear the mortgage, interest only can work but only tends to work for those on a basic income of £100,000 or more where big bonuses are paid and used to clear chunks off their mortgage. Do you think there is still a place for interest-only mortgages? There is a place for them for but only for the right clean who has the means to actually clear the debt and can evidence it upfront.
Historically, anyone could take out an interest only mortgage, and lenders didn't care much about evidence of a strategy to repay the capital at the end. Particularly in the 1980's and 1990's when interest rates were hitting 13% (and inflation wasn't too far behind), many people relied on the option to select a lower mortgage payment. They needed the extra money to 'eat and heat'. The big question is, are we heading the same way again? If the cost of living and inflation continues to rise, will the currently strict rules on interest only lending be relaxed to assist with borrower affordability? We know from experience the risk of doing this is that we later have an aging population, approaching retirement with mortgages still outstanding. But the market has already responded to this issue by revamping equity release and offering RIO products and other retirement lending options.
Interest Only mortgages are rocketing in popularity. However, it is not the residential mortgage market where this is happening, but the Equity Release sector. Q1 2022 saw a 14% ioncrease in the amount borrwoed oveer thwe same period in 2021. As Residential lenders have made their Interest Only policies tighter over the last few years, so clients desperate to keep their property have turned to a different option. Homeowners over the age of 55 can remortgage their Interest Only residential mortgage at the end of its term to a Lifetime Mortgage where no monthly payments are required and no affordability checks are completed. It sounds like the magic cure for those homeowners at the end of their term struggling to find an option that does not involve moving out of their home. Consumers need to be careful though and ensure they seek professional advice, pay the interest on their loan if possible and reduce the capital if they can.