Experts delve into why the number has halved since 2015
The number of interest-only and part-interest-only mortgages has halved since 2015 due to borrowers moving on to repayment loans or repaying earlier than expected, data analysis from the Financial Conduct Authority (FCA) has revealed.
In spite of this, many brokers believe the declining number of interest-only mortgages is in fact a good thing for both customers and the market alike.
How interest-only mortgages polarise opinion
Adam Hinder (pictured left), chief executive at Simply Lending, said residential interest only-mortgages often polarise opinion.
“Cases where interest-only has been advised on a residential mortgage based upon robust justification are few and far between the many ill-advised cases submitted throughout the 2000s and 2010s,” he said.
Hinder believes the reduction is based upon more robust advice being provided, combined with lenders tightening up their residential interest-only criteria. The declining number of interest-only mortgages, Hinder said, is in fact for the betterment of the sector and customers.
“As a firm we do not advise interest-only residential mortgages whatsoever, and often encounter clients coming to the end of their interest-only term with no meaningful plan other than the undesirable downsizing option,” he said.
Clive Read, owner at Goldmanread, said the main reason interest-only lending is declining are the regulatory changes which have resulted in toughened criteria. This particularly effects lower income households, Read said, as they have less equity available in their properties.
“One of the main effects of these restrictions is on first-time buyers who typically have higher lending requirements, lower base incomes and smaller deposits,” he said.
Read believes it could be argued that tougher interest-only criteria has heightened property access inequality. In agreement with Hinder, he said it is always best to advise customers to structure their mortgage on a repayment basis, if they are able to do so.
Jamie Alexander (pictured right), mortgage director at Alexander Southwell Mortgage Services, concurred with Read, that the decline in interest-only lending is primarily due to stricter regulations, as well as economic conditions favouring repayment loans, increased borrower awareness, and financial literacy efforts.
However, Alexander said that this enhances market stability and reduces risk. While this may impact property access equality, he said advising clients to opt for repayment mortgages, when possible, remains wise for equity growth and risk mitigation.
“Personally, I try to avoid recommending interest-only as there is always a higher risk element attached to them,” he said.
Interest-only mortgages becoming a niche product
Justin Moy, managing director at EHF Mortgages, said many of the original interest-only mortgages were afforded on the basis that homeowners would downsize at some point in the future.
Therefore, Moy added that the number of interest-only and part-interest-only mortgages halving since 2015 makes sense, especially considering property prices have increased substantially over the last 10 years.
“There will be others who have moved into equity release and later life lending too, to help family get on to the property ladder and repay old interest-only mortgages when maturing,” he said.
Interest-only lending, Moy said, has been proactively positioned as a niche rather than a mainstream option since the early 2010s, with more controls and regulation. He believes this has contributed significantly to the declining number of interest-only mortgages.
“However, with the high rates of the current market, many will end up using interest-only just to afford their payments, and survive this difficult period,” he added.
Do you believe the declining number of interest-only mortgages is a benefit for the market and customers alike? Let us know in the comment section below.
