But, in the right circumstances, interest-only remains a very useful tool for brokers whose clients want to manage their cash flow or have alternative methods they want to use to repay the loan.
Earlier this year, the Financial Conduct Authority (FCA) published the results of its thematic review of interest-only customers.
It found that nearly one in five mortgage customers have an interest-only mortgage, with 1.67 million interest-only and part capital repayment outstanding mortgage accounts.
The regulator has expressed concerns over the measures customers have in place to repay the balances, but it’s important to note that it has not dismissed interest-only as a valid product for the right clients.
Lenders have tightened their criteria, often restricting the loan to value they lend on interest-only, or requiring borrowers with a smaller deposit to pay a portion of the capital on a part and part basis.
The key thing to remember when considering an interest-only mortgage for your clients is that the lender will want confirmation that there is a plausible repayment strategy in place and may require evidence of any repayment they intend to use to clear the balance.
The repayment plan
Acceptable repayment strategies could include cash savings, pension, endowment, stocks and shares, second homes or buy-to-let properties, and lenders will often consider a percentage of the forecast amount or current balance to allow for market fluctuations.
It’s also worth noting that sale of property and downsizing or moving into rental accommodation can be considered a valid repayment strategy, as long as it is both plausible and realistic.
Interest-only isn’t for everyone, but in the right circumstances it can give you the tools you need to structure a flexible solution for your clients.