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Return of interest-only could be answer to mortgage affordability constraints, debates industry

Return of interest-only could be answer to mortgage affordability constraints, debates industry
Samantha Partington
Written By:
Posted:
June 4, 2025
Updated:
June 4, 2025

Reviving interest-only mortgages to make homeownership more affordable was among the topics debated by industry professionals at a roundtable ahead of the launch of the regulator’s discussion paper on affordability and access to borrowing.

The Financial Conduct Authority’s (FCA’s) consultation on the simplification of its lending rules is about to end and a debate around alternative affordability tests, innovation and responsible risk taking is set to begin.

Already, we’ve seen big names from the high street – including Barclays, Nationwide and Santander – make changes to their affordability stress tests to allow households to borrow more.

And now, among the discussions of where to go next, the idea of using interest-only to ease the affordability burden has resurfaced.

At a recent industry roundtable hosted by public relations agency MRM, one network boss said house buying must be made more affordable and shared ownership didn’t solve the problem.

One solution, the panel heard, would be a return to true interest-only. It would be accompanied by given review dates of the borrower’s circumstances, along with the ability for customers to routinely and arbitrarily overpay whenever they can.

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But should we bring back the ability to take out a mortgage where the borrower can only afford to service the interest on day one, rather than pay off the debt?

Although product innovation is one of the topics that will be brought to the fore this month when the FCA begins its public discussion, the panel said innovation is not always needed if the answers are already there.

At its peak in 2012, the number of interest-only mortgages – including part and part – reached 3.2 million, according to UK Finance. By the end of 2023, this number had plummeted by 73% to 864,000 after changes to lending rules dictating credible repayment strategies and thorough affordability assessments restricted their distribution.

Now, only those with the most equity and appropriate assets in place at the start of the loan are typically offered an interest-only deal.

 

Doubts of reality of borrower reviews

So, should interest-only be one way to improve access to mortgage borrowing?

Jon Rawley, mortgage and protection broker at Dart Mortgages, said: “I’m really not sure that offering interest-only mortgages without the availability of other assets or sufficient equity ‘because that’s the only way it is affordable’ would be a sensible move.

“It’s all very well saying such an arrangement can be reviewed every few years, but history tells us many borrowers do not review the situation. There are thousands of old interest-only mortgages coming to maturity where there is still no plan to repay the capital other than to sell the property and, in many cases, selling is not practical.”

More than 180,000 interest-only mortgages are set to mature by 2027. Those without an exit strategy will face a steep rise in their monthly payments as they’re shifted over to a repayment deal. Alternatively, those over the age of 55 may be forced to turn to equity release.

“From a lender’s perspective, offering interest-only at high loan to values and to, for example, first-time buyers, increases their credit risk, requires them to hold more capital, and may limit their ability to innovate for other lending options,” said Rawley.

Other borrowers may ultimately end up paying a higher rate to subsidise this type of interest-only lending.

 

Return to interest-only should not be ruled out

Nicholas Mendes, mortgage technical manager at John Charcol, said he could see the appeal of reviving interest-only at a time when affordability was under pressure and younger buyers were being priced out. But a return to true interest-only lending at scale, he added, would need to be approached with caution.

He said: “The idea of bringing back interest-only as a mainstream route to affordability assumes that the product itself is the problem-solver. The issue runs deeper. Wage growth hasn’t kept pace with house prices and we’re still dealing with a supply shortage.

“Reintroducing interest-only without strict parameters risks deferring the affordability challenge rather than addressing it.

“That said, I don’t think we need to rule it out entirely. There’s a space for interest-only in the market, provided it’s properly underwritten. A version with clear review points, mandatory overpayment options, and more dynamic income assessments could help specific borrower profiles – for instance, professionals or people in high-growth career stages. But this would have to be tightly controlled and targeted, not a blanket solution.”

However, Mendes warned of the reputational risk to lenders of being seen to promote potentially unsustainable debt.

“In a market where trust is everything, that matters. The risk is that in the pursuit of affordability, we end up encouraging debt without a repayment strategy. And we’ve been down that road before,” he added.

Mendes thinks a push for greater product flexibility, more part and part options, more tailored underwriting, and better support for borrowers whose incomes don’t fit the traditional mould would be a better direction to take.

 

Sustainable borrowing from day one

Rhys Young, senior partner for mortgages and protection at Affinity Financial, is not in favour of a return to true interest-only. These products risk storing up long-term financial issues for borrowers, especially if property values don’t rise as expected.

“I’d much rather see the mortgage market shift toward longer-term fixed rate products with more generous affordability assessments.

“This would provide both stability and predictability for borrowers, while still improving access to homeownership in a responsible way. Ultimately, we need solutions that support sustainable borrowing, not just affordability on day one.

“A good suggestion could be a 10-plus-year fixed rate mortgage with no early repayment charges after five years, for example,” he said.

The FCA’s consultation on the simplification of its rules closes today. The regulator then plans to launch a discussion paper in June, which will include debate around risk appetite and responsible risk taking, alternative affordability testing and product innovation, lending into later life and consumer information needs.