What should advisers' approach be towards interest-only mortgages?

This article is part of
Guide to interest-only mortgages

What should advisers' approach be towards interest-only mortgages?

The changes in the way lending criteria has evolved means that the type of person who an interest only mortgage would be ideal for has changed.

Perhaps it has reverted back to its original intention. - the higher net worth borrower.

David Hollingworth, associate director, communications at London and Country Mortgages, says: “You might have people who have used interest-only for some time and are building up a repayment vehicle alongside that, so they may be looking to continue that and review their deal and mortgage.

“There may still be the opportunities for that type of borrower because they have an existing plan in place which they can demonstrate, all the substantial equity are already in place.

"But more generally, it starts to become more of a niche product and perhaps it has that higher net-worth feel to it.”

Target market

So who are interest only mortgages not ideal for?

The changes to interest-only mortgages means that the group of people who it is least likely to be suitable for are first-time-buyers.

Still, Ray Boulger, adviser at John Charcol, says although interest-only mortgages rules out a large number of first time buyers, he has seen a number of first time buyers in London, who are putting down a “surprisingly” large deposit, money which has typically come from the parents or grand-parents.

He adds: “For most first-time-buyers it is probably not the best product any way. Bearing in mind how low interest rates are, for a typical first time buyer it will make more sense to have a repayment mortgage.

"If they have an interest-only mortgage then they are relying on the capital growth in the property for the LTV to go down which is not guaranteed and interest rates will go up at some stage.”

Mr Hollingworth comments: “Without ruling out first-time-buyers completely, because it is not a complete ban, I do think the vast majority will end up going for repayment.

"That is why you start to see people opting for longer mortgage terms at 35 to40 years; spreading it over a longer period to give extra space to manoeuvre."

Rather, the sort of person to whom interest-only could make sense, according to Mr Boulger, would be a young newly qualified professional who is going to see a big increase in their salary over the short term or someone that will be getting a large bonus.

They are using the interest-only option to control when they make lump sum payments.

By starting off with an interest only mortgage, it might be an opportunity for them to acquire a more expensive property than they would otherwise have bought, which they can convert to repayment when their salary increases.

Older demographic