The Intermediary – March 2025 - Flipbook - Page 67
L AT E R L I F E L E N D I N G
Opinion
Interest-only still
has a place in
today’s market
T
he Financial Conduct
Authority (FCA)
recently announced
that it’s looking at
ways to simplify some
of the rules around
responsible lending.
As a result, there has been a lot
of discussion around the current
responsible lending rules, with the
debate over interest-only mortgages
being reignited once again. I’ve
seen articles questioning if interestonly mortgages might make a
comeback, and if it’s time to make
a concerted effort to revive them.
In truth, interest-only has never
really disappeared in certain areas
of the market, and is still part of the
market today.
The interest-only mortgages
we see today, though, are a far cry
from those we saw before the Global
Financial Crisis.
In 2007, interest-only mortgages
accounted for a third of all mortgage
sales, and of these, around 75% had
no reported repayment strategy,
according to the FCA.
Aer the financial crisis, we saw the
regulator – and lenders – quite rightly
tighten their stance on a number of
areas, interest-only mortgages being
one of them.
However, for older borrowers, when
the circumstances are right, and with
proper guidance including taxation
implications, consideration of
vulnerability and a full affordability
assessment, interest-only mortgages
can be a suitable option.
For example, a couple in their
70s may wish to remortgage to raise
capital to help their child with a gied
deposit for their first home.
Perhaps they’re retired or semiretired, living in a large home with
substantial equity, and planning to
downsize in a few years. While they
may not want – or be able – to commit
to the monthly payments of a full
capital repayment mortgage, they
may comfortably be able to cover the
interest-only payments using their
income, pension, or savings.
In this case, they might decide to
remortgage on an interest-only basis,
gi the deposit, and downsize at their
own pace in the near future – paying
off the capital in full at that time.
Until then, an interest-only mortgage
would help keep their monthly
payments down.
Of course, for any loans where the
full capital element isn’t included in
the monthly payment – including part
interest-only and part-capital – there
has to be a solid plan in place to repay
the capital at the end of the term.
As a responsible lender, we need to
see proof of that repayment strategy,
so all the necessary documents must
be provided before we can even
consider a mortgage offer.
A changed market
The example above is a scenario where
we believe interest-only mortgages can
be used responsibly.
If house prices continue to rise as
predicted over the next five years,
we may see even more first-time
buyers (FTBs) turning to their parents
for help.
Recent figures from the Mortgage
Advice Bureau show that one in seven
people are either currently relying on
or planning to rely on gied deposits
from family to purchase a home. With
parents helping their children onto
the property ladder through gied
deposits, interest-only mortgages
could play a larger role in the market,
especially for older borrowers.
The latest data from UK Finance
shows that, at the end of 2023, there
ROB OLIVER
is director of distribution at
Dudley Building Society
were just 664,000 pure interest-only
mortgages still outstanding, marking
a 5.4% decrease from 2022.
On top of that, there were 200,000
partial interest-only mortgages – those
combining capital and interest – that
number was also 9.9% down compared
to the previous year.
Looking at the bigger picture, the
overall interest-only mortgage book
has shrunk in size each year since the
end of the financial crisis.
The total number of interest-only
mortgages, including part-and-part,
have fallen by 73% in number and 56%
in value since 2012, when the data was
first tracked.
It will be interesting to see if
interest-only mortgages are revisited
as part of the FCA’s potential easing
of rules, and whether this is an area
where we could see increased appetite
from both lenders and brokers in
the future.
Interest-only mortgages
understandably carry the risk of being
associated with some of their past
irresponsible uses. However, as shown
in the example above, an interest-only
mortgage can be used responsibly
when there is evidence of a reliable
repayment strategy in place.
For older clients, it’s important
that brokers don’t dismiss interestonly mortgages as an option, or as
an alternative to equity release or
a retirement interest-only (RIO)
mortgage. Brokers should remain
open-minded about how interest-only
mortgages can be used to help older
clients raise capital. ●
March 2025 | The Intermediary
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