For borrowers with a decent salary and a credible plan to repay their mortgage, interest-only products have a place
The interest-only mortgage is a controversial product, referred to in some quarters as a ticking timebomb. The moniker results from the glut of deals agreed in the 1990s with borrowers who had no strategy for repaying the mortgage.
In the next few years, around 934,000 borrowers could be in financial danger as these deals reach maturity. Banks and building societies have been urged to contact customers to warn of the risks they face, with some borrowers expected to be forced to sell their home if funding is not available.
Interest-only loans were seen as one of the worst examples of irresponsible lending in the lead-up to the credit crunch. The rules were subsequently tightened to reduce the level of such lending and, by the end of 2012, most lenders had stopped offering the products altogether.
Since then, however, interest-only loans have slowly been reintroduced to the market. The majority of lenders now offer some form of interest-only mortgage but with far stricter criteria, such as a deposit of 25–50 per cent and an income of £75,000 a year or more.
Such mortgages can be a viable option for those who have an exit strategy in place or who receive big bonuses or a large part of their pay as commission. They also still hold the potential to work well for buy-to-let landlords.
In the short term, interest-only mortgages are unlikely to be anything more than a niche product. Tightened restrictions and concerns around a repayment shortfall mean they should not be used by the majority of homeowners. However, for those with a decent salary and a credible plan to repay the mortgage, this product certainly has a place.
Carl Shave is director at Just Mortgage Brokers