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

This article is part of
Guide to interest-only mortgages

According to Jaedon Green, director of product and distribution for Leeds Building Society, most interest-only mortgage borrowers now tend to be more in the older demographic, typically above the age of 40, and individuals who have built up some equity in their home.

The other types of people suited to interest only mortgages are those in larger properties, who already have a sizeable equity in their property

So what should advisers’ approach to advising interest only borrowers be?

Mr Hollingworth says, first of all, brokers have to spell out what the different types of mortgages and risks are.

It may sound elementary but he stresses that doing this is very much a case of trying to assess that the borrower has understood the risk, is comfortable with it and so is prepared to keep their repayment vehicle under review.

Mr Hollingworth explains: “Even if you set [a repayment vehicle] up, it is not just a case of paying into it regularly. If returns are not what you hoped for, then you can start falling behind.

“It is about spelling out that risk and making sure the borrower is fully aware of what they are taking on, where their responsibilities lie and that they have a clear picture of how they intend to repay the mortgage.”

Future of the sector

Looking to the future of the sector, brokers say the interest-only market is in a healthier place now. Where previously you had lenders withdrawing from the market, they are now able to offer interest-only mortgages where it feels appropriate.

This means they are unlikely to disappear entirely, but at the same time they are unlikely to become a mainstream product for everyone.

But advisers believe more lenders will enter the market, as already some have done and are allowing the remortgaged property to be used as the repayment strategy.

Andrew Montlake, brand director at Coreco, says: “Almost every lender will come into the interest-only market, but it will be strict. It is a valid and important option for some borrowers but it is not for everyone.

"While there will be more choice and lenders in the market, it will not go back to how it was before.

“If you look at the high-net-worth London market for example, interest-only is a very valid proposition for some borrowers. Lenders, who don’t have that option, are potentially missing out on very good business.”

A major consequence of the well-intended tightened regulation is that the rules around interest-only closed off a large part of the market to certain borrowers.

But in March 2018 the regulator introduced some rule changes.