In the past five years, the number of lenders offering interest-only mortgages has more than doubled. Nevertheless, many economic institutions believe that they are risky and can leave borrowers in significant financial difficulty. However, lenders are now using these mortgages to attract wealthier buyers.
Interest-Only Mortgages Aren’t So Popular Anymore
Currently, there are 33 lenders that offer interest-only mortgages. This type of mortgage requires the borrower to pay the interest servicing the debt but not the capital sum. In June 2013, there were only 12 lenders offering this type of mortgage.
The Financial Conduct Authority (FCA) has tried to tackle interest-only mortgages over the years, due to growing fears that borrowers will be left without means to repay loans when they mature. But unlike before the financial crash of 2008, new interest-only mortgages are generally aimed at wealthier consumers.
A New Target Market
According to Trinity Financial, clients are now “generally older borrowers with a larger deposit”. Usually they also have a substantial salary, thus have a better chance of repaying the capital at the end of the mortgage term.
Santander and HSBC require borrowers to have a sole income of £100,000. NatWest asks for a minimum of £75,000 with a minimum equity of £200,000 in the home they are looking to mortgage. Metro Bank doesn’t have a minimum income, however only wealthier homeowners can usually meet the bank’s criteria.
Interest-Only Mortgages Could Make a Comeback
Finance experts at Moneyfacts have stated that there is “confidence amongst lenders” regarding interest-only mortgages. Following the 2008 financial crisis, interest-only mortgages were almost abandoned, but new regulations have since been put in place and the fear of irresponsible lending has reduced. Finance providers are also branching out into various markets, so that they can keep up in a competitive business world.
There has often been much concern about how interest-only mortgages will be repaid at the end of the term. There is now less cause for concern because the rules have relaxed here too. Most lenders will now accept the sale of the mortgaged property if a borrower has enough equity. For example, the mortgage company Accord allows the mortgaged property to be used as part of the repayment strategy as long as there is 50% equity, along with a minimum of £200,000 in the property.
