Mortgages  

How have interest-only mortgages evolved?

This article is part of
Guide to interest-only mortgages

By this time banks and building societies had already started to make changes to the way in which they were lending mortgages.

In 2013 the FCA carried out a review to assess whether interest-only mortgages were working for customers and whether borrowers would be able to repay their debt as the interest-only loan reached maturity.

It identified three distinct tranches of interest-only maturities, 2012 to 2020, 2021 to 2027 and 2028 to 2033.

They also encouraged lenders to step up their engagement in terms of communicating with customers well before they come to the end of their interest-only loan.

In 2015 lenders fulfilled an industry-wide commitment to contact all interest-only mortgage borrowers with loans scheduled to mature before the end of 2020, to ensure they were on track to repay their loans and, where there looked likely to be a problem, work with borrowers to rectify the situation.

Full wave of change

It was not until April 2014 when the rules of the Mortgage Market Review came into force that the sector felt the full wave of change.

Saying that, prior to this, lenders had already started making changes in anticipation of what was coming down the line.

One of the biggest changes brought in by the MMR was the assessment of a person's affordability.

Prior to this, mortgage lenders assessed a borrower's eligibility based on their income and what they could afford to pay back.

This information could have been based on a person's pay slip, or in a lot of cases, self-certification was accepted by lenders.

But the MMR put a stop to that.

The new rules meant that lenders would ask to see plans for repaying the full loan once the interest-only period ends, instead of relying on increased house prices as the only repayment plan. 

Higher LTV interest-only was one of the features that had all but disappeared from what mortgage lenders were offering.

An RBS spokesperson comments: "In advance of new advice rules that came into force in 2014 through the Mortgage Market Review we decided to step back from offering interest-only mortgages to focus on providing advice on capital repayment loans. 

"We re-entered the interest-only market in September 2015, offering these mortgages to high-net-worth customers only, with strengthened criteria around customer eligibility and acceptable repayment methods.

"We believe that for customers with a sustainable and high income, interest-only mortgages can potentially be a suitable mortgage type. They offer the customer greater flexibility in how they pay back their mortgage."

Ray Boulger, senior mortgage technical manager at John Charcoal, says: "For several years, lenders were looking for ways to avoid lending effectively and so the terms for interest-only got worse, and there were some lenders who stopped doing interest-only completely."