After the financial crisis, interest-only mortgages became a rarity with borrowers having to prove how they would pay off their loans, but things have now begun to change.
Under the scrutiny of the Financial Conduct Authority (FCA), lenders seemed to abandon the controversial interest-only market, as reports of “mortgage prisoners” indicated that borrowers trapped on expensive, interest-only deals, unable to remortgage, were the worst affected.
But the recent trend away from interest-only mortgages is being redressed, as lenders recognise that for some borrowers interest-only is a viable option and are keen to develop these niche markets.
Number of lenders offering interest-only has tripled
Moneyfacts data shows that the number of lenders offering interest-only loans has increased to 33, almost three times the number available in 2012. Largely driven, it seems, by the mutual sector, Hinckley & Rugby Building Society, Hanley Economic Building Society, Leek United Building Society and Accord (part of the Yorkshire Building Society) have all entered the market with interest-only products.
Specialist lender Masthaven has also introduced interest-only products to its range, and mainstream banks HSBC, Barclays, Santander and Natwest all offer interest-only products.
Increasing customer demand
Indications are that interest-only mortgages are no longer restricted to borrowers with high incomes or significant equity. The FCA’s relaxation of the regulations around retirement mortgages in March means that there has been a surge in retirement interest-only (RIO) mortgages. Not only do RIO mortgages solve the problem of existing interest-only borrowers coming to the end of their mortgage term with no way of repaying their loan, they also provide a viable alternative option for releasing equity in retirement.
However, interest-only mortgages for homeowners not looking for an RIO mortgage will need to have either significant equity or a high salary, or both. Natwest requests a minimum income of £75,000 and minimum equity of £200,000 in the property being borrowed against, whilst HSBC asks for a minimum sole salary of £100,000. Santander and Metro Bank have no income requirements but do have stricter lending criteria to meet.
Have an exit strategy in place
With an RIO mortgage where the property is sold to repay the loan when the borrower enters care, sells or dies, interest-only borrowers will need to show a strategy for paying off the mortgage at the end of its term.
The good news is that lenders, to avoid future interest-only “mortgage prisoners”, are taking an active interest in how the mortgage will be repaid and ensuring borrowers fully understand the implications of an interest-only loan.