MortgagesMar 2 2022

Interest-only mortgage costs at a 30-year low

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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.

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."

We’re yet to see rising interest rates and an increase in the cost of living impact top line market health.Christofi

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. 

But when it comes to paying off the interest, the £652 in interest paid a month by today’s homebuyers is costing them 22 per cent less than it cost the generation who got onto the housing ladder 30 years ago.

We have noticed a growing number of prospective borrowers express concerns about the cost of living.Cox

However, Garrett added: "While this is now starting to climb in line with an increase to the base rate and .... we can’t reduce the overall cost of buying, there’s no doubt the mortgage sector has helped thousands to overcome it at a far more affordable cost in recent years.”

And while there is a healthy mortgage approvals market, brokers are witnessing continued high levels of business, although many have warned that there are dark clouds to come as household finances become stretched. 

Nicholas Christofi, managing director of Sirius Property Finance, commented: “We’ve just witnessed one of the strongest starts to a year in the past decade, which is quite an achievement given the astronomic market growth we’ve seen pretty much throughout the past 12 months. 

"It’s fair to say that we’re yet to see rising interest rates and an increase in the cost of living impact top line market health.

"As the year plays out, these factors are likely to become more prominent and this will no doubt curb the number of buyers entering the market and the sums they choose to borrow.”

Graham Cox, founder of the Bristol-based Self-Employed Mortgage Hub, agreed.

He said: "The fact that interest rates are starting to go up seems to be focusing minds, and people are trying to lock into fixed rate deals while rates are still pretty good.

"Having said that, we have noticed a growing number of prospective borrowers express concerns about the cost of living and the direction of house prices, so there's definitely a degree of nervousness that wasn't there a few months ago."

simoney.kyriakou@ft.com