The Financial Conduct Authority (FCA) has said interest-only mortgages were originally aimed at niche groups of consumers, such as high net worth consumers, and those wishing to take advantage of specific types of tax break, where the mortgage was usually linked to an investment policy assigned to the lender.
However, over time their availability widened considerably, despite accompanying repayment vehicles enjoying a less favourable tax treatment, with few questions being asked as to why an interest-only mortgage was required by the borrower, or how capital would be repaid at the end of the term.
In the buy-to-let (BTL) market, interest-only continues to be common place.
This is because, compared with the residential sector, the buy-to-let investor is more likely to sell the property and repay the mortgage to realise profits, rather than keep the property for a longer period of time.
One main advantage for buy-to-let landlords opting for the interest-only option than a repayment, is that such mortgages are less expensive than repayment mortgages in the short term.
Landlords can use the rental income from the tenant to cover the interest payments on the mortgage.
The rates on buy-to-let mortgage deals are also typically greater than they are on residential mortgages, so this can be a way to counter the increased costs, UK Finance adds.
Risky business?
While interest-only buy-to-let mortgages may sound risky because the landlord is not paying off the capital debt, those buying property as a business typically have a different perspective to those buying their own home to live in.
Most landlords will view buy-to-let as a long-term investment. They will be counting on appreciation in house prices which they hope will, in time, allow them to sell the property, pay off the mortgage debt and still make a profit.
But there is a risk that if house prices fall landlords will find themselves in negative equity and be unable to remortgage or even sell the property.
Lenders build in an element of time when the property may not have tenants to help make sure the loan remains affordable for the landlord.
For example, Bluestone Mortgages offers interest-only mortgages to both residential and buy-to-let landlords.
The lender's interest-only buy-to-let mortgages are available to customers on Bluestone's 'clear' or 'AAA' products with a maximum LTV of 80 per cent.
The mortgage lender said top slicing with income is available on all interest-only buy-to-let deal, with a minimum rental income of 112 per cent interest coverage ratio (ICR).
Steve Seal, director of sales and distribution at Bluestone Mortgages, said: "Strengthening our buy-to-let proposition was a major development for us and a key part of our ongoing development plans and growth strategy.
