Interest-only mortgages - good or bad idea?

It’s a positive sign that both the regulator and lenders are seeking solutions to the financial pressures some customers will face in terms of increasing mortgage rates and costs. However, this requires careful implementation, as the risks of an interest-only mortgage will need to be explained to the borrower. A switch to an interest-only option should not be taken without proper consideration given to other options, e.g. extending the mortgage term. The overall cost of such a measure should also be taken into account as well as the exit strategy out of interest only. Lenders should be sending out a clear message that support is always available but with an explanation of all the risks and factors to think about.

This could be a good short-term fix, but could also be a long-term nightmare. This should be for existing mortgage holders who are facing financial difficulties. Going on interest-only for some time will decrease the overall mortgage term, and this will naturally increase monthly payments when going back onto a repayment mortgage. It is imperative that borrowers understand these implications and that they are explained properly. If this comes into effect, it should not be used to simply save a few quid a month. Used incorrectly, this could cause far greater financial concerns in the future.

Interest only is neither new nor novel. Lender forbearance used to be a support staple for borrowers, until 2008. Whilst working at a lender I could place a borrower on interest only for up to six months if their circumstances had changed dramatically. So, this isn't reinventing the wheel, it’s the weaning borrowers back off interest only, which will be the issue.

Real care needs to be taken by borrowers when considering a move to interest-only. The strategy needs to be short-term, and with a plan to get off it that does not involve crossing your fingers and hoping things get better in the future. That said, where people can demonstrate they have had adequate advice, and a solid strategy in place, lenders should be more open to flexibility in allowing borrowers to move between repayment and interest-only within the term of their mortgage, without the borrower having to miss payments before this option is considered. It actually makes more sense to allow someone trying to get ahead of the problem and manage it to make the move as it shows some foresight and understanding of their finances, which makes them more likely to be able to move back to a repayment mortgage.

The problem with interest only is the pressure society puts on us to own our home outright. Interest only in the short term will help families struggling financially and this should be encouraged by the FCA and Treasury and we shouldn't be penalised on our credit files if we take this as an option. Long term, with the right education and innovation from lenders, interest-only mortgages could lead to increased savings, larger pension funds, spending more into the economy and there will be more fluid movement of houses as people downsize and release equity.

This is a short-term fix with a long-term risk. As borrowers become accustomed to paying interest only, later on, it’s going to be hard for them to go back to repaying their mortgage and in a situation where the time they have to repay the capital outstanding is shorter. If these measures do come into play, a robust plan is needed as to how borrowers will get back onto a repayment mortgage in the future.

Any forbearance by the lenders is very welcome news. Moving borrowers onto interest only for a period could help. Other options include extending the term or allowing, say, a 3-6 month mortgage payment holiday. Of course, borrowers will end up paying more in interest payments but that may be a small price to pay if it means they can keep their home.

There are many instances in the past when interest-only options should have been available to my clients who were experiencing financial hardship, but lenders have been unwilling to agree. The issue has been the regulator's view of interest-only arrangements. A mortgage should be suitable for a client's circumstances and if these change, so should the mortgage. If the alternative is financial hardship and the agreement is for a meaningful, defined period it is a no-brainer. This is just common sense.

Flexibility from lenders when you need help is always a good thing, but interest-only should be the last option. In order, the forbearance measures should be: produce a detailed budget and trim away luxuries, such as Disney+, Amazon Prime, Netflix. All need to go before a lender is going to change your mortgage. Extend the repayment term, which produces a lower monthly repayment but carries less risk for the lender and the borrower, as the loan is still guaranteed to be paid off at the end of the term. Put some of the mortgage on interest-only. Having worked out what is an affordable payment, is it possible to achieve that by just putting some of the mortgage on an interest-only payment basis? Moving the full mortgage to interest-only is the last option, but make it time-limited, with a review every 6-12 months.

Having a conversation with borrowers individually is key. Once lenders figure out pain points, they can figure out a solution. They can reduce repayments for a period of time, interest only is an option, and also have professionals give individual financial advice, so borrowers can see where they can actually save money. They've taken profits from borrowers, now it's time for them to give a little for a long-term relationship and build customer loyalty.