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Interest-only mortgage options

31.05.2016

The interest-only market has contracted massively over the past decade as the mortgage market review (MMR) resulted in lenders withdrawing from the market. Before the MMR was introduced, interest-only mortgages were an option for practically all borrowers as there was no focus on how they would repay the mortgage. But now there must be a credible repayment strategy in place, which often includes savings and investments.

Interest only is available if you are able to manage a 50 per cent loan-to-value as sale of the property is deemed an acceptable repayment strategy because it gives people a potential to downsize in the future. While there is good choice for borrowers at 50 per cent LTV, above this it gets trickier.

The previous lending climate was irresponsible so the changes are welcome. But there are still some borrowers who interest only suits perfectly – such as those in receipt of predominantly bonus-driven remuneration – who will now struggle to get an interest-only mortgage because the pendulum has swung too far the other way.

Interest only is appropriate for borrowers with a genuine repayment strategy – whether it be bonuses, sale of investments or an inheritance. Some of the more specialist lenders will lend on interest-only basis but want annual bullet reductions in the lend so this will satisfy the regulator that the loan is being structured on a repayment basis.

There are concerns that there will be swathes of borrowers unable to repay their interest-only mortgages but this is unlikely to be the case. The interest-only lending that was done was quite historic so most borrowers have time to sort it out and most will be addressing the issue. It is important to take action and to seek advice if you are concerned that you won’t be able to repay the capital at the end of your interest-only mortgage term.

Jonathan Harris
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Jonathan Harris
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