Diversity in mortgage products is a positive thing, but not every mortgage product is suitable for every person.
There has been a rise in interest-only mortgages, but there are many thoughts as to whether this is good news for the industry, and for applicants.
Andrew Montlake, managing director at mortgage broker, Coreco, said; “Many people used interest-only in the past as a way of making sure they could actually afford the mortgage in the first place, and deferred worrying about how they were going to pay it back.”
Montlake continued by saying; “It should never have been possible for someone to borrow 90 per cent of a property’s value on the basis they would pay the loan back by selling it later on down the line – what happens if that property then depreciates in value?”
While there was a fall in mortgage products in 2020, “interest-only” deals increased. At the start of 2020, 50% of available mortgage products had an interest-only option. By the start of 2021, this figure was at 63%.
While the industry is unlikely to return to the interest-free heyday, there is no denying this is a popular form of mortgage for many people.
What is an interest-only mortgage?
As the name suggests, with an interest-only mortgage; you only pay the interest each month. The loan amount doesn’t change. This allows for lower monthly payments.
However, at the end of the mortgage term, the full amount of the property needs to be paid in full.
You will find that most mortgage lenders have strict criteria when it comes to interest-only mortgages.
Alex Winn, mortgage expert at Habito, said; “Typically, lenders require interest-only borrowers to have larger incomes and higher levels of equity in their property.”
The most important issue for lenders is how the borrower aims to pay back the mortgage.
Can you pay back the mortgage in full?
Chris Sykes, a mortgage consultant at Private Finance, said; “If you can prove you have sufficient cash or stocks and shares then this will be acceptable for most lenders. Equally, you might have another property you can sell in the future which can act as your repayment vehicle.”
The most common way to pay off this style of mortgage is to sell the property. Montlake says; “For this to be considered, at the end of the mortgage term must be shown to be a viable option.”
Sykes spoke about why people would choose an interest-only mortgage, saying; “There are plenty of reasons why people might use an interest-only mortgage. If you are someone who earns a large proportion of your income from bonus or commission then interest-only might be a good option. You can use an interest-only mortgage to keep monthly repayments low, with a view to making large overpayments as and when you can. You might also want to enjoy having more available money for holidays or other activities, or perhaps it makes sense whilst you are paying school fees.”
There are concerns for borrowers with this style of mortgage. Montlake said; “If your repayment method does not pan out, the lender will require its money back at some point – and in this instance, borrowers will need to sell the property in order to repay the loan. For those borrowers who do have sufficient funds or a source of repayment, or high net worth individuals with various other assets, interest only can be a very credible option. It is all about taking proper advice and going into any loan undertaking with eyes wide open and a full understanding of the risks involved.”
Anyone looking to arrange informed and up to date guidance regarding a mortgage should speak with an experienced professional.