Interest-only mortgages are currently enjoying something of a resurgence in product numbers, with recent industry insight indicating that the number of products available have doubled from 102 in 2013, to 193 in 2019.
While lenders are becoming increasingly more willing to consider lending on this basis, there continues to be a distinct lack of demand or appetite for interest-only mortgages, thanks to a legacy of poor approval and repayment policies for homeowners up and down the country.
What is an interest-only mortgage?
An interest-only mortgage works very differently to a conventional repayment mortgage, and means that the payments being made by a homeowner on a monthly basis are only covering the interest that is due. Once the agreed mortgage term has come to an end, the homeowner will still owe the entire capital amount of the loan.
What’s the latest?
While there has been an increase in the availability of interest-only mortgage products in recent years, there has not necessarily been an appetite for them. Recent research conducted by the Bank of England and the Financial Conduct Authority shows that approval rates in the period from early 2013 to late 2018 actually fell by 9%, which was at odds with the overall number of repayment mortgage approvals, which almost doubled.
There was a time when interest-only mortgages were incredibly popular and relatively easy to obtain. High rates of return meant endowment policies paid out generously, and people enjoyed the double benefit of lower monthly payments (even after paying into their endowment policy), plus a windfall when the policy matured and paid out more than what was needed to clear the mortgage capital.
However, in later years, rates of return fell, endowment policies began to perform poorly and instead of a windfall alongside the loan repayment, endowments failed to provide enough to pay off the capital. The result was interest-only mortgages falling out of favour.
Why is there a lack of demand?
Here are a number of reasons why there continues to be a lack of demand amongst prospective and existing homeowners:
In the aftermath of the global financial crisis, lending criteria was tightened up across the board. While they may arguably have loosened again for certain types of mortgage, lending assessment criteria remains strict for interest-only mortgages.
Because of more stringent criteria introduced following the financial crisis, some interest-only mortgage customers were effectively trapped in their existing mortgage deal. They are unable to move to a new deal as they cannot meet the new, more strict lending criteria. This has served as a warning for current mortgage-seekers.
The lending criteria for interest-only mortgages remain quite restrictive and, in some cases, availability is limited to those earning in the region of £75,000 – £100,000 per year. It’s also much more difficult to get an interest-only mortgage as a first-time buyer.
Because borrowers are only repaying the interest on the loan, they need to prove that they have in place a viable plan for repayment of the capital at the end of the loan term, and in some cases, you may end up owing more than saving in the long-run. Mortgage lenders will be sure to closely scrutinise this as part of the application process and, if there is anything they are unhappy about, there is a risk that they will turn down the application.
If you need advice on interest-only mortgages, we’d be happy to help. Contact The Mortgage Centres today for friendly, expert advice about your mortgage options, and impartial guidance on what’s best for you.