Signs of reprieve for interest-only mortgage prisoners

Signs of reprieve for interest-only mortgage prisoners

More and more lenders are offering interest-only products while there are signs of a shrinking market, signalling a potential reprieve for some trapped in their current policies.

Data from research firm Moneyfacts has shown there are currently 33 lenders offering interest-only mortgages, up from 12 in June 2013.

These products were classed as products where the repayment method is the sale of the property only.





Number of interest-only lenders*






What is more, according to UK Finance, the number of homeowners with interest-only mortgages has almost halved in six years.

This is likely to be good news for interest-only borrowers, who following the financial crisis found themselves trapped in their policies as banks were less keen to take such customers on.

The Mortgage Market Review (MMR) had made it even harder for them to switch to newer products as it imposed tougher affordability criteria on borrowers many were not able to meet.

But the market is still a far cry from what it used to be.

Moneyfacts said 73 lenders offered an interest-only option in June 2008, more than twice as many as today.

Charlotte Nelson, finance expert at Moneyfacts, said the interest-only mortgage road was still turbulent but there were signs of renewed confidence among some lenders.

She said: "Interest-only was almost abandoned after the financial crisis, yet the slow growth since then shows that new regulations put in place following the Mortgage Market Review have seen the fear of irresponsible lending subside. 

"With competition for business in the mortgage market high, providers have started to branch out into niche areas such as interest-only."

Following the financial crisis the regulator was concerned about people not being able to pay back their mortgages at the end of their term, which means modern policies are available at lower loan-to-values and borrowers must be able to prove they have a repayment strategy in place.

"This rules out a lot of borrowers simply because they do not have a large enough deposit or a secure enough plan," said Ms Nelson.

But there are alternative ways for people reaching retirement as the Financial Conduct Authority (FCA) has recently loosened its rules around retirement interest-only mortgages, some of which allow the mortgage to be repaid by the sale of the house on death or if long-term care is needed, which may be another possibility for those who are struggling, according to Ms Nelson. 

David Hollingworth, associate director of communications at London & Country Mortgages, said the data signaled some signs of reprieve for interest-only mortgage prisoners but only where they could meet the more stringent criteria set after the financial crisis.

He said: "More people are probably considering [selling their home] as an alternative, however there will still be some additional requirements. 

"Lenders will be looking for quite high equity in the property, a low LTV and an [assessment] of income requirements. 

"It is starting to look more like a high-net worth product rather than for the mainstream."