Blogs Sponsored Posts 

The current state of interest-only mortgages in the UK

Melissa Thompson

An interest-only mortgage is a type of mortgage where the borrower pays off the loan interest each month but makes no capital repayments. Instead, borrowers are expected to make sure they have an investment plan in place to pay off the debt at the end of the term. Some people face a shortfall however, because their investment underperforms or it is never set up in the first place.

The problem with interest only mortgages

Pre-credit crunch, interest only mortgages were fairly common but in 2008 house prices plummeted and the financial markets collapsed and with it, many people’s strategies for repaying their mortgages also collapsed. Today, there are estimated to be over 1.5 million homeowners with interest only mortgages in the UK who face a shortfall. There are particular concerns about older borrowers who are unable to pay off their loans and also lack the ability to refinance them.

The harsh reality is that if a borrower does nothing, then they will lose their home and the lender will have the right to take their home and sell it to clear the debt. There could even still be a debt to clear by the borrower if the property doesn’t fetch a good price.

So what can someone do when they are unable to pay the capital owed on a maturing interest only mortgage?

Sometimes a lender will agree to extend the term of a mortgage while switching the loan to a repayment mortgage. But for many, the sums simply don’t add up because they can’t afford the repayments that now include both the capital repayments and interest. Another potential solution is equity release which is a way to get cash out of a property without the need to move home. Equity release is a popular solution for older borrowers who want to stay in their home. Downsizing to a smaller home is another option if a borrower’s existing home has increased in value. The property can be sold to clear the debt and any profit that is left can be used as a deposit on a smaller property or to pay for it outright.

Interest-only mortgages in 2019

Today, interest only mortgages are still available and are in fact making a bit of a comeback with more and more lenders offering them again. However, lenders no longer offer them to borrowers at the lower end of the affordability scale.  Previously, they used to be a popular option for people looking for a mortgage option with a lower monthly payment (If you use an interest-only mortgage calculator you can see just how much cheaper the payments will be compared to a full repayment mortgage) but now the criteria to get an interest only mortgage is more stringent making it only available to a more select consumer base. Criteria include a deposit valued between 25% and 50%, a big salary and evidence of a robust repayment plan whereas, pre-credit-crunch a basic plan of saving was sufficient

What about the buy to let market?

Another popular mortgage option in the UK to face changes in recent years is the buy to let mortgage. Buy to let refers to the purchase of property specifically to rent it out. Due to a tax crackdown on buying property investments and on rental income, the buy to let market took a downturn in recent years and now, getting a buy to let mortgage is not as easy as it once was

Despite this, buy to let mortgages are still popular in the UK with bricks and mortar seen as a sound long-term investment. This coupled with low savings rates and turbulent financial markets mean that there are still serious investors looking to buy properties with buy to let mortgages.

In conclusion, although the interest only mortgage market has changed dramatically; this type of mortgage, along with the buy to let mortgage, is still available and is even growing again in popularity.  They are, however, offered under much stricter conditions and as a result are now an option for only the wealthier borrower.