Prior to the 2008 financial crisis, interest-only mortgages were a popular choice for home buyers.
With this type of mortgage, the borrower pays off the interest each month, but makes no capital repayments. Borrowers were expected to have plans in place that would repay the capital at the end of the term, and whilst many took out endowment policies, some borrowers didn’t have firm plans in place.
There are estimated to be around 1.7m interest-only mortgages that are due to mature over the next few years. The Financial Conduct Authority (FCA) has urged borrowers who anticipate that they won’t have sufficient assets to repay the capital at the end of their mortgage term, to take professional advice.
There are alternative types of mortgage available, such as repayment, lifetime or equity release, that can be put in place to avoid the risk of borrowers defaulting and having to sell their property in order to repay their loan. Following the recession, the introduction of tougher lending criteria under the FCA’s Mortgage Market Review in 2014, meant that lenders were required to use more stringent tests before granting loans, leading to repayment mortgages becoming the main type of mortgage offered.
Several lenders have recently returned to the interest-only mortgage market. However, the loans that are now available are much more strictly controlled. Borrowers are expected to have large salaries, substantial deposits to put down and clear repayment plans in place. They will also need to demonstrate that their monthly interest payments will be affordable throughout the term of the loan.
If you would like to know more or are considering your repayment options on an existing interest-only mortgage and would like some advice, then do get in touch.
A mortgage is a loan secured against your home or property. Your home or property may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
Think carefully before securing other debts against your home.