Following the 2008 financial crisis, interest-only mortgages attracted somewhat of a negative reputation.
As the Financial Conduct Authority notes, before the crisis lenders were not required to check whether an interest-only mortgage borrower had a credible repayment plan.
So while popular before 2008, product sales data from the FCA shows the number of outstanding interest-only mortgages has been on the decline. As of the second half of 2022, there were less than 1mn interest-only mortgages outstanding.
Around 750,000 were interest-only, making up 9 per cent of regulated mortgages, and more than half (55 per cent) of which were taken out before the 2008 financial crisis. Around 245,000 were part interest-only, representing 3 per cent of regulated mortgages.
And according to the FCA’s director of retail banking David Geale, it is “encouraging” to see the number of interest-only mortgages reducing faster than expected.
Separately, buy-to-let mortgages, which are typically not regulated, are often interest-only.
But with buy-to-let having become a less attractive investment, and the number of regulated interest-only mortgages on the decline, are we reaching the end of the road for interest-only loans?
“It is definitely true that since the Mortgage Market Review in 2014, when the FCA changed the rules around who lenders could offer interest-only mortgages to, that demand for them has been declining,” says Nicola Firth, chief executive of Knowledge Bank, a mortgage criteria database.
But Firth also says she does not think the industry will ever see interest-only mortgages disappearing, and that they “have their place”.
“Regarding buy-to-let, while the interest on a buy-to-let mortgage is no longer tax deductible, the reduced outgoings of an interest-only mortgage still increases the rental yield,” she says.
Despite the diminishing numbers, Alex Beavis, group director – mortgages and protection at Sesame Bankhall Group, agrees that interest-only mortgages still play a “valuable” role in the current mortgage market.
Besides buy-to-let investors looking to maximise yields, he cites affluent and high-net-worth individuals using interest-only loans to maximise financial returns across a portfolio of assets and debt.
Indeed, the number of clients asking for and taking up an interest-only mortgage has somewhat declined because it has become a bit more of a HNW product, says Christine Newell, mortgages technical director at Paradigm, due to the criteria that needs to be demonstrated by the client to take an interest-only deal.
“For example, [lenders require] a minimum equity of between 25 per cent and 40 per cent of the value of the property, and the acceptable types of repayment vehicles,” she says.
“Most clients suggest they may downsize to repay the loan and this strategy is deemed high risk, as not everyone, when it comes down to it, wants to sell the property they have lived in for all that time... Lenders place tighter criteria on clients who opt for downsizing as their repayment strategy.”
