Number of interest-only lenders on the rise

04 June 2018

According to UK Finance, the number of homeowners with interest-only mortgages has almost halved in six years. However, research from Moneyfacts.co.uk shows that the number of lenders offering an interest-only option has increased by eight in just two years, indicating heightened willingness to offer this form of lending.

Charlotte Nelson, Finance Expert at Moneyfacts.co.uk, said:

“This latest piece of research from Moneyfacts.co.uk shows that while the interest-only mortgage road has been and still is turbulent, there is confidence among some lenders, as the number of providers offering an interest-only option has increased to 33. However, the number of lenders in this sector is a long way from how things were 10 years ago, with 73 lenders having offered an interest-only option in June 2008.

“Interest-only was almost abandoned after the financial crisis, yet the slow growth since then shows that new regulations put in place following the Mortgage Market Review have seen the fear of irresponsible lending subside. With competition for business in the mortgage market high, providers have started to branch out into niche areas such as interest-only.

“However, there have been warnings about interest-only mortgages, with the FCA concerned that many borrowers may not be able to repay the capital at the end of the term. It is therefore important to note that interest-only options are purely available to those at lower loan-to-values, and with strict regulation, borrowers must be able to prove they have a repayment strategy in place. This rules out a lot of borrowers simply because they do not have a large enough deposit or a secure enough plan.

“If a borrower already has an interest-only deal and is worried about repaying the capital, the first option is to talk to their mortgage provider who can help decide whether overpayments or switching to a repayment deal would help.

“Alternatively, those who have reached retirement may have another option; the FCA has recently loosened the regulations on retirement interest-only mortgages, with options specifically designed for borrowers who have reached later life with no means to repay the capital. With a few of these products being launched onto the market recently, this may be a possibility for those who are struggling, as the mortgage is repaid by the sale of the house on death or if long-term care is needed. Equity release is another possibility, but this is dependent on the loan-to-value and other factors such as age.

“Entering into an interest-only mortgage today is still not completely risk-free, and borrowers will need to ensure they have the means to pay off the balance at the end of the mortgage term. If borrowers are unsure they should speak to a financial adviser about their options.”

*Repayment method sale of property only