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Increase in interest-only lenders

Increase in interest-only lenders

Category: Mortgages
04/06/2018

While the number of homeowners with an interest-only mortgage has almost halved over the last six years as people become increasingly aware of the risks that come with this mortgage type, lenders appear to be more optimistic about this sector of the market. Indeed, the number offering an interest-only option has increased by eight in two years, which may not seem like much, but is quite a difference considering there were only 12 such lenders in 2012.

Lenders reappearing

Even compared to last year, there are now four more lenders operating in this market, bringing the total to 33. Charlotte Nelson, finance expert at Moneyfacts.co.uk, commented: "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."

Jun-13 Jun-16 Jun-17 Jun-18
Number of interest-only lenders (repayment method sale of property only) 12 25 29 33
Source: Moneyfacts.co.uk

"However, the number of lenders in this sector is a long way from how things were 10 years ago, with 73 lenders offering an interest-only option in June 2008," she added. The decrease from this to just 12 in June 2013 is mainly due to the financial crisis, which saw interest-only mortgages nearly completely abandoned as they were deemed too much of a risk.

So why are they becoming more popular again? Well, as Charlotte said, "new regulations put in place following the Mortgage Market Review have seen the fear of irresponsible lending subside." Additionally, competition in the mortgage market is so high that providers are continually looking for ways to branch out and make themselves more attractive to borrowers. One niche area that they are now looking to compete in is interest-only.

Interested in interest-only?

Whether borrowers want this expansion is another matter, especially as the financial regulator has been warning people away from these mortgages, concerned that many may not be able to repay their debt at the end of the mortgage term. "It is therefore important to note that interest-only options are purely available at lower loan-to-values, and with strict regulation, borrowers must be able to prove they have a repayment strategy in place," Charlotte said.

She added: "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."

Already invested?

If you're currently on one of the few interest-only deals out there in the market, and don't have a clear plan for repaying the capital, Charlotte suggests that your "first option is to talk to [your] 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."

Another possibility for over-55-year-olds would be equity release, but this would be dependent on the loan-to-value and other factors. You'd be able to get more information on your options by talking to an equity release advice service.

What next

You can use our mortgage search to find those mortgages that are available on an interest-only basis, but don't forget to compare them to repayment mortgages, as you may very well be better off paying a little more now and not having to worry about coming up with a large lump sum in 20-30 years' time.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.

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