The number of providers offering interest-only mortgages has risen significantly in the last five years – but you’ll need a hefty salary to get your hands on a good deal.
Before the financial crash, interest-only mortgages were very popular – but earlier this year the Financial Conduct Authority (FCA) expressed concerns about the ability of many existing borrowers to repay their loans.
Now, new data from Moneyfacts shows that more and more lenders are offering interest-only deals again.
Here we take a look at whether these products really are making a comeback.
- If you’re buying a home and need some advice on your mortgage options, call Which? Mortgage Advisers on 0800 197 8461.
What are interest-only mortgages?
Interest-only mortgages involve only paying the interest on your loan each month, and then paying off the capital you’ve borrowed at the end of the mortgage term.
These mortgages are risky, as they require borrowers to save or invest enough during the course of the mortgage term to have enough to pay off the full amount at the end.
- Find out more about how these deals work in our full guide on interest-only v repayment mortgages
Interest-only deals on the rise
Moneyfacts research shows that 33 providers now offer interest-only mortgages, almost triple the 12 lenders doing so in June 2013.
Despite this, the figure remains well below the 73 lenders recorded a decade ago, before the financial crash.
But unlike some of the risky deals taken out in that era, the products currently on the market are mainly only available to wealthy borrowers.
Interest-only mortgages for the rich
The best deals are currently available at 40% loan-to-value ratio – with Accord’s two year discount product at 0.97% leading the way in terms of initial rate, though this is subject to a £1,495 fee.
As well as a large deposit, you’ll need a big salary to get a decent deal.
While Metro Bank and Santander officially have no minimum income requirements for their interest-only loans (though strict lending criteria), Natwest asks for minimum income of £75,000 and a minimum equity of £200,000 in the home you’re borrowing against, and HSBC requires a sole salary of at least £100,000.
You’ll also need to show a strategy for how you plan to pay off the mortgage at the end of the term – whether a savings plan, an investment portfolio or other assets you plan to sell. While it’s probably you’ll also benefit from capital growth in many areas of the UK, you will not be able to rely on this alone as your plan to pay down the loan.
Concerns around interest-only mortgages
UK Finance claims that there are 1.7m outstanding interest-only mortgages in the UK.
After concerns about many older borrowers not having enough money to pay off their loans and lacking the ability to refinance them, the FCA announced it would amend some of the rules around these mortgages in March.
The watchdog has sought to increase the number of deals available to those who reach later life and are unable to repay their deals – and a few products have been launched recently in this area.
Earlier this week, Hodge Lifetime launched a new retirement interest-only lifetime mortgage for people aged over 55 – claiming to be the first later-life lender to launch such a deal.
The deal, which is available for two-year or five-year terms, allows voluntary overpayments of up to 10% per year, with the remaining capital being paid off when the owner dies or goes into long-term care.
If you have an interest-only mortgage and you are worried you’ll struggle to pay it off, get in touch with your provider at the earliest opportunity, as they will be able to advise on whether it’s possible to restructure your payments or switch to a repayment mortgage.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Which? Limited is an Introducer Appointed Representative of Which? Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 527029). Which? Mortgage Advisers and Which? Money Compare are trading names of Which? Financial Services Limited.