MailOnline - Interest only mortgage products

It seems lenders have renewed confidence in the property market given that rates have come down consistently in recent weeks and house prices look steadier than some expected. For now at least, there is no sign of the crash some warned of. Mortgage advisers have extra responsibility when it comes to recommending an interest-only mortgage. It is one way of reducing monthly mortgage payments, which many people may look to utilise for the first time in a generation to combat the cost of living crisis. The downside is that it will cost more overall, and carries more risk of the home being lost. Whether or not I'd advise certain clients will always be personal, but it's unlikely to be a first-time buyer option. A credible repayment strategy and a much higher level of deposit/equity will always be required for an interest-only mortgage.

We are seeing an increase in interest only products becoming available, mainly due to the clients who are seeing an increase in monthly payments due to rising interest rates - combined with the cost of living rising. The benefit to the client is that their payments will be cheaper, however most clients we speak to will normally want to look at a repayment mortgage. The industry was burnt by interest only offerings previously, so lenders have come back to this market cautiously. In most cases clients should be going for a repayment mortgage if the budget allows, as the end goal is usually to have their property debt free by the end of their term. However this increase in interest only options does open up more flexibility for those that may be struggling with rising costs, even if it's only a short term option.

There could be a myriad of reasons why any lender introduces new products. However, one reason may be that mortgage rates decoupled from Overnight Index Swap (OIS) rates in mid-September 2022, largely in response to the chaos created by the Liz Truss and Kwasi Kwarteng mini-Budget debacle. This change has created an opportunity for lenders to offer more flexible and customized mortgage products, as they are no longer constrained by the benchmark OIS rate. Competition among lenders is increasing as they seek to attract borrowers with better terms and rates. The benefits of interest-only mortgages to borrowers are significantly more favourable monthly payment rates compared to mortgages that require capital repayment as well as interest. However, the risk is the balance will not be reduced.

Lenders will want to keep their margins and profits, so instead of just reducing margins, they are going to have to be more creative with products and criteria. Interest-only mortgages have always been a taboo subject with brokers and this comes across in the advice given to customers. We are led to believe that interest-only is the enemy, as yes, if not managed correctly they will have to sell the property at the end of the mortgage. But that has never changed and the customer should understand that and be reminded of it at every review. Managed correctly, the customer could vastly increase their pensions, savings and overall wealth. Who is to say saving the repayment into stocks and shares isn't going to outperform the decrease of the mortgage? Interest-only gives certain customers the ability to have more options with their wealth.

The regulator's view may change, but do not expect interest-only mortgages to become common. The regulator has worked hard to exclude this option and there is now a defined increase in responsibility through Customer Duty rules to make sure any advice is enduring for the term of the contract. As a result, there will remain a small cohort of borrowers who will find interest-only an option and for whom it will be relevant, however, for many it will not be attainable. Lenders are likely to use interest-only more readily as a tool to temporarily aid customers experiencing financial difficulty.

Lenders are releasing more interest-only products because they know many borrowers will need to move to interest-only to keep remortgaging costs down. Faced with a doubling or tripling in interest-rate, interes-only products may be the only workable option for some. But to qualify, you'll need equity in your home of 30%+ and a similar sized deposit if you're buying.

Lenders understand that, with the cost of living crisis, more applicants are going to have less surplus income and as such cannot afford to service the mortgage payments, as they could have previously. The payments on interest-only mortgages are more affordable. Borrowers benefit from lower monthly payments so can often borrow more than on a standard repayment mortgage. At the end of the mortgage term the borrower will have a lump sum to repay and as such will not own the home outright. I would not have recommended interest-only mortgages to first-time buyers in the past as they are high risk as the borrower needs a repayment vehicle in place to pay off the mortgage at the end of the term. However, now this could be the only way borrowers are able to make it onto the property ladder.

Interest-only mortgages have been around for a long time. For the right client, they can be beneficial. For example, if someone wants to keep their initial payment down and then pay off a lump sum once a year due to an annual bonus, interest-only would be worth considering. You need to make sure you have a solid repayment strategy as if you don't, the mortgage will be the same at the end of the mortgage term. We find that several High Net Worth individuals have interest-only as their repayment method.