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Borrowers ‘brainwashed’ against interest-only mortgages – analysis

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  • 09/05/2019
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Borrowers ‘brainwashed’ against interest-only mortgages – analysis
Years of ‘brainwashing’ have acted to stifle demand from borrowers for interest-only mortgages, even though product numbers have jumped sharply, according to brokers.

Data from Moneyfacts released this week showed that the number of interest-only deals on the market has almost doubled in recent years, from 102 deals in 2013 to 198 today.

Despite this jump, the number of approvals for interest-only deals has shown no great movement. Figures from the FCA and Bank of England show that approvals for interest-only mortgages have fallen from 26,592 in the first quarter of 2013 to 24,148 in the final quarter of last year.

This is particularly notable given overall residential mortgage approvals have almost doubled over that same timeframe, to 323,700 from 183,900.

Weaning borrowers off interest-only

Andy Wilson, director of Andy Wilson Financial Services, noted that both brokers and borrowers have been in the mindset of “interest-only is bad and deals are scarce” for some time, even though if intermediaries looked hard enough there have always been deals around.

Nick Morrey, product technical manager at John Charcol, agreed, arguing that borrowers had been “brainwashed” into believing they were not allowed to do “true interest-only”.

He continued: “If you brainwash a population for such a long period, telling them that lenders don’t like downsizing as a way of paying off that loan, then you start to encourage people to think that repayment is the only way forward. Borrowers have almost been weaned off interest-only.”

Wider availability doesn’t mean more demand

Wilson noted that mainstream lenders will want to “have as many strings to their lending bow as they can”, but will temper that by being picky over who gets the products with the potential to store up problems, such as interest-only deals.

Wilson continued: “The wider availability doesn’t automatically mean more demand, and I suspect many advisers in the broker world have wised up to this product not being attractive to most of their core clients.”

A specialist product

Sebastian Riemann, financial consultant at Libra Financial Planning, said that interest-only is “very much a specialist product these days”, noting that as loans are assessed on equivalent repayment affordability stress test, “if you can afford repayment why would you go interest-only?”

He added: “There are always exceptions of course, but by and large it is a product for high earners, high loans and those that get repaid relatively quickly. Personally I’ve seen more of a shift towards repayment on buy-to-let as the tax advantages of interest only mortgages are being eroded away.”

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