Suitability of interest-only mortgages

Mr Nicholls says risk-averse individuals should no longer be able to access interest-only mortgages, as most lenders have set stringent low loan-to-value limits for interest-only qualification.

Martin Richardson, general manager of business development at Leeds Building Society, says in terms of residential buyers these loans could be suitable for, those who are seeking to minimise the monthly cost of servicing their mortgage could look at an interest-only loan.

Those with endowments or with large pensions, who wish to utilise some of their tax-free lump sum on retirement to repay the mortgage, could also contemplate interest-only mortgages, says Keith Barber, associate director of business development at Family Building Society.

Other examples could include retired customers who currently live in a large family home and intend to downsize into a smaller more manageable property in future years and use the excess in equity to repay the mortgage.

Mr Barber says advisers must stress to their clients that it is very important to note that when considering an interest-only mortgage, they must be able to take the risk they may not have sufficient funds at the end of the mortgage term, should their repayment plans not perform up to expectation.

He says the position must be reviewed and advice sought during the term of the loan if there is any likelihood of a repayment vehicle not performing.

Dale Jannels, managing director of Atom (All Types of Mortgages Ltd), says those who are asset rich, for example existing landlords with a number of properties with equity that could be sold to repay the residential interest-only loan, could consider this product.

People entitled to annual bonuses, the fluctuating income of the self-employed, employments where lump sums are received after a number of years in service and those with existing investments, such as endowment policies, etc, could also consider this product, he adds.

Interest-only will in general be suitable for the more sophisticated borrower and in particular those who already have an interest-only mortgage with a robust repayment strategy who want to move house or remortgage, says Ray Boulger, senior technical manager of John Charcol.

Under FCA transitional rules, lenders do not need to apply post-MMR lending criteria to anyone with existing borrowing not increasing the size of their loan, though in practice many continue to do so and so this may not as simple as it appears.

Mr Boulger says interest-only mortgages can also be particularly useful for those with an offset mortgage, and who use the offset facility actively.

At current low interest rates, Mr Boulger says a repayment mortgage will be more appropriate for most borrowers but adds an interest-only mortgage might be suitable for a newly qualified professional whose income is expected to increase rapidly over the next few years and who has other more expensive debt, such as student borrowing, they want to prioritise repaying.

He says interest-only mortgages could even be the right strategy in theory for others who have built up debt with a higher interest rate than the mortgage.

Mr Boulger says: “A holistic financial planning view for such a borrower would suggest paying off the most expensive debt off first, which, with the exception of 0 per cent balance transfer credit card borrowing will often mean prioritising the payment of non mortgage debt.

“However, such borrowers are very unlikely to be able to meet lenders’ current onerous interest only criteria as most people with more expensive borrowing will not have the minimum £150,000 equity normally required for an interest-only mortgage.

“Thus, although nearly everyone taking out a mortgage will now be required to obtain advice there will sometimes be a conflict between what might be good holistic advice and what mortgage can actually be obtained.

“This stems, at least in part, from the fact that the Mortgage Market Review looks at mortgages in isolation rather as one part of the borrower’s overall financial planning.”