Before the financial crisis in 2008, many borrowers opted for an interest-only mortgage. This was a cheaper option for them, as they only paid interest each month. Borrowers were expected to have adequate plans in place to repay the capital at the end of the mortgage term, as was the original intention with endowment mortgages. Lending wasn’t as tightly controlled at that time, and it subsequently became clear to the government and the regulators that some of these loans were at risk, as borrowers didn’t actually have sufficient resources to repay the capital when it became due.

Changes in affordability criteria

Lenders have become increasingly aware that some people with interest-only mortgages that are due to mature over the next few years are likely to face difficulties. They are engaging with them and providing information on alternatives such as repayment or lifetime mortgages (a form of equity release) in order to avoid the risk of borrowers defaulting and having to sell their property in order to repay the loan.

In 2014, the Financial Conduct Authority’s Mortgage Market Review introduced new criteria on lending risk and mortgage affordability. As borrowers were now subjected to more rigorous checks, interestonly mortgages became much rarer.

More lenders returning to the market

Several mortgage lenders are now offering interest-only mortgages, taking the view that there is nothing wrong with the concept, as long as the borrower can show that their application is backed up by clear plans to repay the capital. Borrowers who are likely to be granted this type of mortgage are older, with larger deposits and higher incomes, with assets available to repay the loan.

If you would like to know more about interest-only mortgages, or are considering your repayment options on an existing interest-only mortgage, get in touch.

As a mortgage is secured against your home or property, it could be repossessed if you do not keep up mortgage repayments.

Think carefully before securing other debts against your home. Equity released from your home will be secured against it. Your home may be repossessed if you do not keep up repayments.