The interest only mortgage market has had a chequered history.
Originally developed alongside endowment insurance products, their popularity soared during the 1980s, with a huge proportion of new mortgages during that period taken on this basis.
Once endowment insurance products started to perform poorly, other methods of repaying the mortgage balance were considered by lenders, such as pension lump sums, inheritance, investment portfolios or downsizing to buy a smaller property at the end of the mortgage term. Such was the norm that many lenders during the mid 2000’s didn't even ask the question as to how the mortgage would be repaid!
This led to a resurgence in the popularity of interest only mortgages with 33% of new mortgages during 2007 taken out on this basis according to the Council of Mortgage Lenders figures.
The financial crisis in 2008 led to Banks and Building Societies reviewing their requirements and new guidelines followed from the industry regulator, the Financial Conduct Authority. Roll on to 2016, and very few lenders permit this type of mortgage for a residential owner occupied property (it is still common with Buy to Let loans). Those lenders that do remain in the interest only marketplace have much tighter controls in place to ensure that a real plan to repay the mortgage at the end of the term exists.
Our view is that interest only is now very much a niche product, but it can work well for those who currently live in a large property and want to keep payments at a lower level prior to downsizing in the future, or have a certain source of alternative repayment.
The remaining lenders in the market have varied criteria before allowing new mortgages on this basis, so this is certainly one area where expert mortgage advice is crucial.
Paul Hardingham and Tony Ibson are Mortgage and Protection Advisers at Innovate Mortgages and Loans. Both have over 20 years of experience advising individuals and businesses across the North East of England. They can be contacted for bespoke advice at paul@innovateml.co.uk or tony@innovateml.co.uk or call 0191 223 3514.
Think carefully before securing other debts against your home.
Your home or property is at risk of repossession if you do not keep up repayments on a mortgage or other loan secured on it.
Innovate Mortgages and Loans is a trading style of Innovation Financial Management Ltd.
