Interest-only mortgages used to be all the rage with borrowers, until lenders deemed them too risky for the mass market and limited their offerings after the financial crash. However, research by Moneyfacts.co.uk seems to suggest that the tide might be turning.
Poor performing endowment policies were the reason behind a large number of borrowers finding themselves unable to repay their interest-only mortgage at the end of their mortgage term. As a result, interest-only mortgages disappeared as a mortgage choice for the wider market, as lenders considered the risk too high.
In May 2013, only 102 interest-only mortgages were available, but moneyfacts.co.uk has discovered that the number has almost doubled over the past six years. Today there are 193 interest-free mortgage products available to borrowers.
While this is still a relatively small proportion of the overall mortgage market (3.86%), it does seem to show a willingness by lenders to relax the rules when it comes to risk.
More products, but no increase in interest-only mortgage approvals
Interestingly, while the number of interest-only mortgages available has increased, there has been no marked rise in borrowers taking them up. Borrowers, it seems, remain cautious around the prospect of an interest-only mortgage after the highly publicised fall out of failed endowment policies leaving many without any means to repay their mortgage.
However, it is more likely that borrowers are put off by lender requirements to secure an interest-only mortgage today. Applicants are expected to present a viable and robust plan for repayment of the mortgage early in the application process for inspection by the lender. Jumping through hoops to pass stricter lending criteria and presenting a feasible repayment plan that will pass the scrutiny of the lender is likely to put many people off, when they coud choose a simpler course of action with a straight repayment mortgage.
Retirement interest-only make up 25% of the products available
44 of the 193 interest-only products available are retirement interest only mortgages aimed at borrowers approaching retirement with no means to repay their interest-only mortgage due to a failed investment or lack of planning.
The Financial Conduct Authority (FCA) stepped in and loosened the regulations, resulting in a greater choice of retirement interest-only products that will allow mature borrowers to pay only their monthly interest on their mortgage until they die or enter long term care, when the property is sold to repay the capital.
Interest-only mortgages may be back on the table, but it’s unlikely they will become the mortgage of choice again as both lenders and borrowers prioritise minimising risk.
