Mortgages  

Interest-only mortgage costs at a 30-year low

Interest-only mortgage costs at a 30-year low
Photo: David McBee via Pexels

Interest-only mortgage costs are lower now than they were 30 years ago, even when adjusting for inflation, latest analysis of the mortgage market has revealed.

Research by mortgage specialist Henry Dannell has revealed the cost of an interest-only mortgage for today’s homebuyers is 22 per cent more affordable today than it was 30 years ago.

While the overall cost of repaying a mortgage loan is higher now than it was in 1992, Geoff Garrett, director at Henry Dannell, said that, taking into account the difference in the Bank of England's interest rates, mortgage rates and inflation, it is cheaper now to service the interest on a mortgage than it was back then.

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He explained: “House prices have climbed considerably since the 1990s, and so even when adjusting for inflation, the current cost of repaying a mortgage is always going to be higher than that faced by homebuyers historically. 

"However, this isn’t the case when it comes to the interest paid. In fact, the cost of servicing interest on a mortgage is actually lower than it was 30 years ago."

According to his analysis, the cost of an interest-only mortgage for today’s homebuyers is 22 per cent more affordable than it has been over the last three decades. 

How it was calculated

The calculations were broken down based on the latest average house price, which according to the Office for National Statistics is £274,712.

At a loan to value of 95 per cent, this would require a deposit of £13,736 with homebuyers borrowing the remaining £260,977.

Based on a 25-year term and an average mortgage rate of 3 per cent, Britain's homebuyers are paying interest of £652 per month, with the average cost of repaying their mortgage coming in at £1,238.

According to historical data, the average property in 1992 would have cost £57,435 in total, with a deposit of £2,872 required before borrowing the remaining £54,563. 

Table shows the average cost of a mortgage (£) and how it differs over the last 30 years once adjusted for inflation
VariableDecember 1991Dec 2001Dec 2011Dec 2021
Average house price57,43597,964167,048274,712
Est average mortgage rate0.080.050.040.03
5% deposit2,8724,8988,35213,736
Mortgage amount (95% LTV - 25 year term)54,56393,065158,695260,977
Interest only payment - per month364388529652
Repayment mortgage - per month4215448381,238
Interest only payment per month - adjusted for inflation 2021832683686652
Repayment mortgage per month - adjusted for inflation 20219629571,0871,238

Average property values sourced from the Gov.uk - UK House Price Index (December 2021 - latest available). Average mortgage rates sourced from the Building Society Association, Trading Economics and Statista

While the average mortgage rate was far higher at 8 per cent, this meant the average homebuyer in 1992 was paying interest to the tune of £365 a month, with total mortgage repayments sitting at £421.

House prices have climbed considerably since the 90s and so even after adjusting for inflation, the average cost of repaying a mortgage in 1991 still sits at just £962. This means that the £1,238 paid by today’s homebuyers is 29 per cent higher than 30 years ago. 

The average cost of an interest-only payment in 1991 climbs to £832 per month, once adjusting for inflation. Even after adjusting for inflation, as well as taking the exponential house price growth into consideration, the average cost of repaying a mortgage in 1991 still sits at just £962.

On the face of it, in terms of pure repayment, the £1,238 paid by today’s homebuyers is 29 per cent higher than 30 years ago.