Interest-only mortgages on the up

Interest-only mortgages on the up

Interest-only mortgages are still popular and account for about a fifth of sales, brokers have said.

The latest financial adviser sentiment survey from Paragon found intermediaries thought interest-only mortgages accounted for 20 per cent of all new business in the second quarter of 2019.

This was up from a perceived 15 per cent market share in 2014 and was a mere 8 percentage points less than when their popularity peaked in 2007 and they made up 28 per cent of new mortgages.

Repayment mortgages made up almost all of the remaining new business in the second quarter of 2019, rising from 60 per cent in 2007 to 79 per cent this time round.

According to Paragon, the findings showed interest-only mortgages continued to offer an effective solution for a substantial proportion of customers.

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.

They rose in popularity in the run-up to the financial crisis in 2008, but there were concerns the products were enabling customers to purchase otherwise unaffordable properties which led in part to the introduction of tougher checks around affordability and repayment plans as part of the Mortgage Market Review in 2014.

At the start of 2018 the Financial Conduct Authority 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.

The problem is likely to sustain as, according to UK Finance, there are about 1.7m interest-only mortgages totalling about £250bn outstanding in the UK, and about 200,000 of these policies are due to mature by 2020.

Many interest-only borrowers are 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 new rules brought in by the MMR 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.

But John Heron, managing director of mortgages at Paragon, said interest-only mortgages could prove useful as they allow borrowers to control costs and invest the funds elsewhere.

He added: “Higher LTV requirements and closer scrutiny of repayment plans however mean interest only is now a much smaller part of the overall market.”

Sarah Drakard, adviser at Cruze Financial Services, said she had seen a rise in both the number of people stuck on interest-only mortgages as well as in the number of new clients interested in starting such a policy.

She added: “It is definitely resurfacing. It is down to the brokers to make sure clients really think through their choices, and it’s something the industry needs to recognise a lot more and be more careful about.”

Amy Finlay, from Edinburgh IFA, said she had also seen a rise in the number of consumers requesting information about and opting for interest-only mortgages.