Increasing numbers of lenders are offering interest-only mortgages but fewer borrowers are signing up to them, new research has revealed.
Tighter rules and stricter lending criteria driven by the financial crisis a decade ago are being attributed for a ‘lack of appetite’ for these once-popular mortgages, which allow the borrower to make payments towards the interest on the loan only.
Indeed, Moneyfacts.co.uk, which carried out the research, discovered that despite a third of all residential mortgages offering interest-only as a repayment option, approvals for these products have plummeted.
In the past six years the number of interest-only products has doubled from 102 in May 2013 to 193 today, according to Moneyfacts.
Yet, figures from the Bank of England and the Financial Conduct Authority (FCA) revealed more than 26,000 interest only mortgage were taken out in the first three months of 2013, a figure which plunged to just over 24,000 at the end of 2018.
Moneyfacts thinks this is likely to be down to the fact there are now strict rules in place for borrowers who want to use interest-only as a way of servicing their mortgage.
Darren Cook, finance expert at Moneyfacts, explained: “Apart from passing stricter lending criteria, it is essential that a borrower looking to apply for an interest-only mortgage first develops a strong and viable repayment action plan before approaching a potential interest-only provider.
“It is likely that the mortgage provider will request and scrutinise this plan early in the application process before proceeding with the application.”
Options at retirement for interest-only borrowers
While few new borrowers are taking out interest-only mortgages, there will be many borrowers who are still repaying loans of this kind which they took out long before the financial crisis, and who have reached retirement age.
For these borrowers, retirement interest-only (RIO) mortgages are a viable option. These mortgages allow the borrower to pay only the monthly interest on the loan until they die or going into long-term care. At this point the property is sold to repay the mortgage capital.
Moneyfacts said there were 193 residential mortgages available on the market with interest-only as the only repayment method. And, of these, 44 were RIOs.
