The number of lenders offering interest-only mortgages has increased in the last two years despite the amount of people borrowing with these products falling.
Analysis by Moneyfacts.co.uk revealed eight providers have entered this market since June 2016 suggesting there is confidence amongst lenders for these options and a willingness to offer this form of lending.
After the financial crisis interest-only mortgages were abandoned, but Moneyfacts thinks new regulations initiated by a review of the mortgage market mean some lenders have put aside fears of irresponsible lending.
What’s more, competition in the mortgage market means lenders are keen to branch out into niche areas such as interest-only, said Moneyfacts.
For consumers it means there is more choice out there – but only for borrowers who are eligible for this form of lending. A crackdown on interest-only lending has resulted in tighter restrictions on who can borrow which has led to the number of people on this type of mortgage halving in the last six years from 3.2 million to 1.7 million, according to UK Finance.
Charlotte Nelson from Moneyfacts explained: “There have been warnings about interest-only mortgages, with the FCA concerned that many borrowers may not be able to repay the capital at the end of the term.
“It is therefore important to note that interest-only options are purely available to those at lower loan-to-values (LTVs), and with strict regulation, borrowers must be able to prove they have a repayment strategy in place.
“This rules out a lot of borrowers simply because they do not have a large enough deposit or secure enough plan.”
Repaying interest-only deals
Borrowers who are already on interest-only deals and who are worried about repaying the capital should talk to their mortgage provider, said Moneyfacts. They will help you decide whether making overpayments or switching would be the best idea.
Rules around retirement interest-only mortgages have been loosened recently too and there are options specifically for borrowers who have reached later life but cannot repay the capital.
According to Moneyfacts there are some new products in this market which could prove an attractive option for those who are struggling because the mortgage is repaid on the sale of the house on death or if long-term care is needed.
Nelson also suggested equity release as another option but said this was dependent on the LTVs and other factors such as age.
She added: “Entering into an interest-only mortgage today is still not completely risk-free, and borrowers will need to ensure they have the means to pay off the balance at the end of the mortgage term.
“If borrowers are unsure they should speak to a financial adviser about their options.”
