View more on these topics

Opinion: Why interest-only is still right for some

During this interest-only maturity peak, brokers can find new ways
to help borrowers who do not wish to cash out just yet

At the start of the year the FCA issued a stark warning to borrowers on interest-only mortgages: stop ignoring the problem.

The watchdog is concerned that a significant number of people on such mortgages are avoiding the issue of how they plan to repay the capital when their term comes to
an end.

This is despite lenders’ best efforts to contact them offering to discuss their various options.

According to FCA research, some 1.67 million borrowers in Britain are on either an interest-only or a part-and-part mortgage. That is 17.6 per cent of all mortgaged homeowners in the UK. So, not an insignificant number.

Maturity peaks
In scenarios like this you often find that big numbers are used to scare people into action. But I am interested in the detail of this issue. How many of these borrowers are ignoring their lender not because they cannot repay but because they do not want to? Perhaps the interest-only mortgage model is working just fine for them.

When the FCA issued this warning it also highlighted three interest-only maturity peaks – the first of which we are in the middle of right now.
According to the regulator, it is likely these borrowers have lower mortgage debt, higher incomes and are approaching retirement. They are asset-rich but often about to be income-poor. Particularly where they are coming to retirement, or will be in the next 10 years.

Limited options
The affordability rules now in place, coupled with the increasing rarity of final salary pensions, mean options for borrowers in this type of situation are far more
limited than they were a decade ago.

The FCA’s recent Financial Lives 2017 research identified that 70 per cent of all interest-only and part capital repayment mortgages are held by customers aged over 45.

Remortgaging onto a term long enough to accommodate the increased cost of switching to a capital repayment deal after this age is not an option with most of the high street lenders, whose maximum age limits are still lower than at specialists and smaller building societies.

Simply repaying the capital over the remainder of the term is also usually impossible. A borrower with an £80,000 mortgage with five years left to run could see payments rocket from £300 on interest-only to £1,500 on repayment, for example.

Yet these borrowers have piles of equity in their homes, they are reliable payers every month and are likely to continue to be.

Lending support
Received wisdom would have you tell them to sell their family home and downsize. But at the age of 45, perhaps they do not want to do this. It may even be that they cannot. If children are still living at home and going to school, for example, this may not be practical.

Brokers know this. They see borrowers in just this sort of situation all the time. Thankfully, there are more solutions coming to market.

The right lenders are keen to support brokers looking to help the thousands of credit-worthy, hard-working borrowers with equity in their homes, who want to maintain the flexibility their interest-only mortgage offers in terms of controlling monthly outgoings.

When the Mortgage Market Review landed, sale of the property became less frequently used as a reasonable repayment method for interest-only. However, where borrowers have the financial ability to downsize but not the inclination to do so right now, why should they not be allowed to make that choice for themselves?

We also know that the way people manage their finances heading into and in retirement are no longer the same as they were even 10 years ago. For example, it is much more common for borrowers to own a buy-to-let property (or several) to provide income in their retirement given that annuity rates have been dismal for so long.

There is no reason this type of asset should not be included for assessment as a repayment strategy for interest-only.

Offer borrowers choices that work for them and they will come to you.

Alan Cleary is managing director of Precise Mortgages



Rise in number of lenders offering interest-only mortgage options

The number of lenders offering interest-only mortgage products has increased modestly over the past two years, according to the latest research from Moneyfacts. The data analyst says that eight additional lenders now offer an interest-only mortgage, indicating a renewed willingness to provide this form of lending. A total of 33 lenders now offer interest-only mortgages. […]


Nationwide plans to launch retirement interest-only mortgage

Nationwide has unveiled plans to launch an interest-only mortgage for older borrowers in its annual report today, as profits and net lending both tumbled. The building society’s pre-tax profits for the 12 months to April were down 7.3 per cent on the previous year at £977m, marking the second annual decline. The lacklustre performance was […]

Number of interest-only mortgages halved: UK Finance

The number of interest-only mortgages has almost halved in the past six years, according to the latest figures from UK Finance. There are currently 1.7m outstanding interest-only mortgages. This is down 46 per cent since 2012, when this data was first collected. The total value of these mortgages is £250bn, down 37 per cent over […]

Kent Reliance to take broader view of landlord income

Kent Reliance has launched new affordability measures for buy-to-let which take a broader view of income, including landlords’ earnings from sources other than the property. The lender, which is part of OneSavings Bank, will use earned income to supplement the interest coverage ratio (ICR) for buy-to-let loans, where the rental property yield in itself does […]

Pension - thumbnail

Engaging millennials: Top five tips

By Jamie Clark, Business Development Manager Our latest research looks to understand the key influences on millennials’ future long-term pension savings. Here are our top five takeaways to consider when developing a strategy for advising them. 1. Every millennial is different. One thing that came through loud and clear in our research was that pigeon-holing […]


News and expert analysis straight to your inbox

Sign up