As interest only mortgages appear to be growing in popularity, Foundation Homes Loans' Grant Hendry considers their appeal in a challenging economy
The following article is supplied by Foundation Home Loans.
A string of recent economic events, a rising interest rate environment and elevated levels of inflation have inevitably impacted people’s financial circumstances, affordability and property-related aspirations over the past 12 months or so, and the financial squeeze continues for many households across the UK.
On a more positive note, a range of options do remain available for borrowers - although these will of course depend on individual circumstances. The intermediary community continues to do a fantastic job in helping their clients find the right solution to match their financial situation - as do the vast majority of lenders in supporting borrowers who may have concerns over their mortgage repayments for that matter.
As a lender, we also remain on the front foot when it comes to providing solutions for a variety of credit-worthy borrowers, and for the purpose of this piece I would like to focus on one of these potential options – the interest-only mortgage. Now it’s fair to say that the interest-only has not always had the greatest of reputation in the past, and with some justification I might add. However, with stricter levels of affordability testing now in place, the lending environment is a rather different place to pre-credit crunch times.
This was evident in recent findings from UK Finance which outlined that, despite a year of rising cost pressures, interest-only mortgage borrowers continued to repay on or ahead of schedule. The data found that there were 702,000 pure interest-only homeowner mortgages outstanding at the end of 2022, 6.9 per cent fewer than in 2021.
In addition, there were 222,000 partial interest-only (part and part) homeowner mortgages outstanding at the end of 2022, 11.9 per cent fewer than in 2021.
In the commentary around this data, it was telling when Charles Roe, Director of Mortgages at UK Finance said: “Lenders continue to refine their targeted programmes to reach out to their interest-only customers, yielding positive results in ensuring borrowers are on track to repay. The small number of borrowers who do not repay immediately upon maturity remains very low, and data indicates the vast majority of these do in fact repay in full over the first few months following the end of term.”
Interest-only stock, which amounted to over three million mortgages ten years ago, may now sit at just over one quarter of that size, but that doesn’t mean it can’t represent an appropriate and responsible solution for the right kind of borrower who meets strict affordability criteria.
So, who might such a borrower be and is demand rising?
In general terms, an interest-only mortgage is more appropriate for those borrowers with a significant level of equity in their home and a strong history of being able to service their payments. Here at Foundation Home Loans, we can lend up to 70% LTV on an interest only basis and up to 80% on a part and part basis. Although this will depend on individual circumstances and lenders who incorporate an interest-only facility are likely to adopt different approaches from an eligibility, LTV and affordability perspective.
Turning our attention to demand, if data from Legal & General’s Ignite platform is anything to go by, this appears to be on the rise with interest-only mortgages reported to be the most common search term on the platform in June, seeing an increase of 53%.
This rise doesn’t mean we are likely to see interest-only mortgages return to favour across the board. However, they are evidently an increasingly popular option in the current economic climate for borrowers who are looking to reduce their monthly costs before potentially switching back to a capital repayment mortgage if, and hopefully when, rates become more favourable. Although, a robust plan needs to be in place to make up the repayment shortfalls and this is where intermediaries will play a key role in the interest-only debate.
After all, it’s vital for all borrowers to seek advice when it comes to understanding how such a facility could influence their mortgage requirements over the short, medium and longer term. And specialist residential lenders will continue to play a key role in providing these types of solutions which can help those borrowers who may be looking for additional financial breathing space in the midst of these challenging economic times.
Grant Hendry (pictured), is director of sales at Foundation Home Loans
