Interest-only returns – and it’s growing up fast – Pierson

In recent months, we’ve seen growing innovation in this corner of the market as lenders explore ways of making homeownership more affordable.

I’m sure there’ll be those in the mortgage industry who have their reservations, though.

When it last darkened our door as a solution to improving affordability for homeowners, endowment policies were in fashion and ‘I’ll sell my house’ was the panacea of repayment strategies.

Homeowners crossed their fingers and hoped for the best – believing the spiel that the insurance policy might even pay out more than their mortgage was worth. And, well, we always had house price inflation to save us.

We know how that worked out.

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At their peak in 2012, when the final policy statement and rules for the Mortgage Market Review were published but still to be implemented, there were close to two-and-a-half million interest-only deals in the market.

At the last count, according to UK Finance, this has dropped to 541,000.

Fewer but more flexible interest-only offerings now available

But this time around, from what we’ve seen so far, interest-only propositions are being more carefully thought through and I’m enthused to see more flexible ways of borrowing money to buy a home.

Lenders are now willing to go to higher loan to values (LTVs) than they have done in the past. The launch from Gen H is a good example.

While the deal is available up to 95% LTV, the interest-only element is capped at 80%, with the requirement that a suitable repayment vehicle is in place in order to exceed 60% LTV.

Nationwide’s recent changes mean that borrowers can now access part interest-only and part repayment to 85% LTV, with the interest-only element capped at 75%. The society insists that sole borrowers must earn at least £75,000 or, alternatively, £100,000 joint – which is more realistic.

The lender has also expanded its repayment options to include UK-based savings, investments, pension funds and other properties.

However, while LTVs rise and the number of acceptable repayment strategies grows, strict income restrictions remain in place. So, who are lenders trying to target?

Who is interest-only best for?

Homeowners on variable incomes are an obvious target customer, where large bonus or commission payments come through quarterly but, during the periods in between, money is a little tighter.

Young professionals on a career path that promises income growth, such as junior doctors or trainee solicitors, are also ideal candidates.

And then there’s everyday families handing over £2,000 per month for childcare. Keeping mortgage costs low during these years is crucial before transitioning later to a full repayment mortgage.

It’s clear to me that these are considered propositions, not just a shortcut to easy access mortgage finance, and while they’re not right for everyone, they’re a good solution for some.

There’s one other protection in place – you must get advice from an intermediary.

That’s a stipulation of the two lenders I’ve mentioned, and I’m sure it will be the case for many more.

This gives us the perfect opportunity to flex our advice muscles and keep in regular contact with our clients to make sure the plans they’ve made to pay off the interest-only element of their loan are still in place.

It gives us the opportunity to contact our clients at regular intervals to say something more meaningful than ‘happy birthday’ or ‘your fixed rate is soon ending’.

Calling them to find out if their repayment plans are still in place and offering advice if they’re not reminds homeowners that while there’s a debt that needs paying back, they’re not alone.

This time around, there’ll be no burying of heads in the sand until the 25th year of the mortgage term – not on our watch.

And not if we educate clients on the risks of interest-only as well as the rewards.