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New homeowners turn away from interest only

New homeowners turn away from interest only

Category: Mortgages

Updated: 11/05/2011
First Published: 11/05/2011

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

New homeowners are turning away from interest-only deals, new figures have revealed.

In the first three months of this new year, the proportion of new mortgages that were interest-only fell to the lowest point in seven years, research by Paragon Mortgages has found.

More than three quarters (77%) of residential mortgages introduced during the first quarter of 2011 were capital repayment mortgages – the highest proportion seen since 1996.

Capital repayment mortgages allow homeowners to pay off their loan and interest at the same time.

Interest-only mortgages became increasingly popular from 2005 as soaring house prices allowed property investors to make quick profits.

However, people are now more reluctant to take an interest-only deal as the property market struggles to pick up any real momentum.

A sharp increase in interest rates would dramatically increase monthly repayments for those on interest only deals.

Banks and building societies have also shied away from offering such mortgages.

"Residential mortgage lenders have been clamping down on interest-only since the start of the credit crunch and the decline of this market shows no signs of slowing down," stated John Heron, managing director of Paragon Mortgages.

Proposed changes in the Financial Services Authority's forthcoming Mortgage Market Review have also had an effect as it is to dramatically lower the amount of interest only business that lenders can conduct.

Figures also showed there was a sharp increase in the proportion of residential mortgage borrowers remortgaging during the first quarter of the year, which could be prompted by speculation of an imminent interest rate rise.

Nearly half (45%) of residential mortgage applications submitted via intermediaries during the period were for remortgage purposes, up from 38% in the fourth quarter of 2010 and the highest figure since the second quarter of 2009.

Conversely, the proportion of house movers is down from 31% to 26%, whilst first-time buyers increased from 15% to 18%.

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