Interest-onlyMay 10 2019

Interest-only mortgages fall out of favour

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Interest-only mortgages fall out of favour

The number of approvals of interest-only mortgages has fallen 9 per cent in the past six years, despite the number of available products almost doubling.

New data from Moneyfacts showed the number of interest-only mortgage products on the market rose from 102 in May 2013 to about 200 products today.

However this has not led to a greater number of interest-only approvals. Figures from the Financial Conduct Authority and the Bank of England show the number of consumers taking out interest-only policies has dropped by 9.1 percent over the past six years.

This decrease comes despite overall residential mortgage approvals increasing by 76 per cent in the same period.

Darren Cook, finance expert at Moneyfacts.co.uk, said: "These figures suggest that although borrowers are still able to locate potential suitable interest-only mortgage products — with around a third of all residential mortgage products offering interest-only as a repayment method — tighter rules and stricter lending criteria following the aftermath of the financial crisis may be leading to a lack of appetite for this sector."

Interest-only deals mean borrowers pay only the interest on the loan during the life of the mortgage and then must repay the full capital when the mortgage term ends, but the industry has seen a rise in consumers concerned they will be unable to pay back the cost of the house.

At the start of 2018 the FCA reported nearly one in five mortgage customers had an interest-only mortgage and stressed it was concerned that shortfalls in repayment plans could lead to people losing their homes.

Earlier this month, a partnership was launched between Spicerhaart Corporate Sales, Excel and law firm TLT to create a solution for lenders and customers with no plan in place to pay off their mortgage.

According to UK Finance, there are about 1.7m interest-only mortgages totalling about £250bn outstanding in the UK with about 200,000 policies due to mature by 2020.

Many interest-only borrowers were also classed as mortgage prisoners because they found themselves trapped in their policies after the financial crisis as banks were less keen to take such customers on.

The Mortgage Market Review had made it harder still for clients to switch to newer products as it imposed tougher affordability criteria on borrowers many were not able to meet. 

Carl Shave, director at Just Mortgage Brokers, said the increase in the number of products was a sign that some lenders still saw the need to cater for the interest-only market.

He added: "The drop in approvals shows that regardless of the number of products, clients' appetite for this type of lending is on the wane and perhaps more telling, that the criteria imposed on the products continues to be very restrictive, limiting availability in the most part to those earning in excess of £75,000 or £100,000 per year."

But Shaun Church, director at Private Finance, said part of the reason for the decrease of approvals was the fact that more first-time buyers were in the market and interest-only mortgages were largely unavailable to them.

He said: "However, on top of this, I think the public opinion of interest-only mortgages has changed significantly post-crash and people see the importance of paying off the debt throughout the years rather than relying on house prices increasing."

imogen.tew@ft.com

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