Mortgages  

Interest-only mortgages still have a future

Peter Izard

Peter Izard

Figures published recently by UK Finance, showed that the number of outstanding interest-only mortgages fell by 13.1 per cent last year compared to the previous year.

This means that the total number of interest-only mortgages has now fallen by over half (54 per cent) in the past seven years, from 2.5m in 2012 to 1.23m in 2018.

Meanwhile, the number of interest-only mortgages that are due to mature in 2019 and 2020 has also fallen significantly (41.9 per cent), falling from 217,000 to just 126,000.

Mortgages scheduled to mature

The latest reduction follows an industry-wide commitment by mortgage lenders to contact borrowers with interest-only mortgages that are scheduled to mature before the end of 2020, to ensure they are on track to repay their loans or work out an alternative solution.

However, it is important that this widespread trend to reduce the number of interest-only mortgages in the mainstream market does not blinker advisers when it comes to working with clients in niche areas.

This is because, just as interest-only mortgages can be deemed as risky products for borrowers who use them to stretch their affordability, without the resources to maintain a repayment strategy.

They can also prove a very useful tool for managing cash flow for wealthier clients who have a strategy to maximise their capital and the means to repay the principal balance.

Consequently, there is still one element of the market where interest-only mortgages remain a key component of firms' offerings and that is among private banks that offer products and services for high net worth individuals.

High net worths

There are a number of reasons why HNW individuals might want to choose an interest-only mortgage.

For many HNW clients cash flow is king.

They recognise that capital can be more effectively deployed across alternative assets rather being than being tied up meeting the rigid payment structure of a repayment mortgage.

For these clients, an interest-only mortgage can significantly reduce their monthly expenses, especially on multi-million-pound properties, providing them with more liquidity to take advantage of other opportunities.

This flexibility is also important for HNW clients who might receive variable income through investments or self-employment, regular bonus income or lump sum payments.

With an interest-only mortgage that allows overpayments, rather than being tied to the lender’s payment schedule, these borrowers can reduce the capital balance on their mortgage when it suits their finances.

A suitable repayment strategy is, of course, the key consideration when it comes to an interest-only mortgage, and HNW borrowers would be well served going to. provate banks to arrange the mortgage.

Interest-only mortgages may be a shrinking part of the market, but they continue to be a very popular choice amongst HNW clients.

So, do not be constrained by the approach taken by mainstream lenders – work with a specialist in this sector and take the private bank approach to interest-only mortgages.