The downside of an interest-only mortgage? They will receive just 2% of home loans by 2034

Interest-only mortgages are declining in popularity, according to new research by long-term lender April Mortgages.

The number of cash-only home equity loans has reportedly fallen by 70 percent over the past decade to 664,000, accounting for just 8 percent of all home equity loans.

Interest-only mortgages mean that borrowers only pay interest each month, and the amount owed remains the same.

They need to find a way to pay off the mortgage in full by the end of the year – usually through savings, investments, inheritance or buying a home.

Assuming the rate of decline continues at the same rate there will be only 184,000 interest-only mortgages by 2034, or just 2 percent of the mortgage market.

Over the past 10 years, more than 1.5 million interest-only loans have matured, according to research, with borrowers paying off their mortgages in full or switching to price payment.

> What’s next for mortgage rates in 2024 – how long will it take for you to adjust?

That means loans are down 11 percent a year on average as the interest-only market shrinks to just over a quarter of its size 10 years ago.

Interest-only mortgages were more popular than they are today, but stricter regulations after the financial crisis allowed banks to offer fewer of them and tightened credit criteria. to applicants.

Rachael Hunnisett, managing director, April Mortgages, said: ‘Part of this reduction in the market will be driven by enhanced regulatory oversight which plays an important role in regulating lending practices, and side of lenders that reduce or remove interest-only products to prepare. their own willingness to lend.

‘Our forecasts based on market trends from the last decade show that interest-only mortgages could reach 2 per cent of all residential mortgages by 2034 .

‘This leaves the future of interest-only mortgages uncertain and limits consumer choice once borrowers have proven their ability to meet repayments.’

Can interest-only mortgages help?

After 2008, some people saw interest-only mortgages as tantamount to irresponsible and reckless lending.

However, while it may not work for everyone, if used correctly, a mortgage alone can be a short-term lifeline or a useful financial tool.

The majority of buy-to-let financing use interest-only mortgages to protect their monthly income, allowing quick access to money they can reinvest in their savings.

This is probably one reason why we haven’t seen a significant increase in mortgage rates in the middle land owner when interest rates increased in 2022 and 2023.

For homeowners who are worried about rising monthly payments, for example those who decided on a lower rate before 2022 and are currently paying off a mortgage, interest payments can only have breathing space.

However, if you have no plans to repay the loan, this should only be used as a short-term measure, and you will return to a repayment mortgage as soon as possible.

Interest-only mortgages are a useful tool for someone who relies heavily on irregular cash flows, such as commission-based payments or loans.

A £200,000 mortgage paid over 20 years at a mortgage rate of 4.5 per cent would cost £1,265 a month. A £200,000 mortgage-only loan on the same scheme would cost £749 a month.

Of course, the fact that no one is paying off the debt is a concern for many.

But most mortgages allow borrowers to make annual payments without paying early.

This means that the borrower can still reduce the loan over time with one payment.

Most fees are capped at 10 percent of the mortgage amount each year, but in some cases it can be higher.

‘Interest rate shocks are affecting many borrowers right now as they close out of their permanent mortgages, showing why interest-only loans should remain widely available to borrowers ,” Hunnisett said.

‘Homeowners who are experiencing significant increases in their mortgage payments may not want to lock in a higher rate or extend their mortgage terms in order to lower rates.

‘An interest-only mortgage can be the only solution in this situation because it offers a return to the borrower, which provides more real payment and security.

‘While interest-only mortgages aren’t for everyone, they can be beneficial for older homeowners with high equity, as well as first-time borrowers who want to improve their mortgage.’

Who can get an interest only mortgage?

The challenge for borrowers looking for interest only mortgages for their own homes is that the lending criteria are very strict.

Mortgage lenders want to know how they plan to pay off the mortgage from the start. This may include buying a home, buying a second home, superannuation, investing or saving.

The loan to value ratio of the mortgage also influences the lender’s decision. Usually the loan-to-value is so high that the lender won’t accept interest only.

Borrowers are usually required to put down a 25 percent deposit, although lenders want more than this.

Some lenders require you to have a minimum income of £20,000 or even £50,000, £75,000 or even £100,000. But other lenders have no minimum income requirements.

In this week’s Navigate the Mortgage Maze column, broker David Hollingworth shares his advice to a reader who is considering switch to an interest only mortgage.

‘Even if you can meet more stringent criteria, I think you should always think carefully before switching to interest only,’ said Hollingworth.

‘The longer you go without defaulting on the mortgage, the harder it will be to switch to repayments.

‘In the past this ended with the end of the life of the mortgage, or they had to sell the property to pay off the balance.

‘Even if the monthly payments are reduced, it’s not a cheap mortgage, and you’ll pay more in interest over that period.’

There are other options for borrowers to consider, Hollingworth said.

He added: ‘Other options include taking out only a portion of the mortgage on an interest-only basis, leaving the rest as repayments so you can keep paying off the majority of the mortgage each month.

‘You can also keep the mortgage at a lower rate but consider extending the mortgage term.

‘It will cost you more in interest, but it will help you reduce the cost of your mortgage.

‘You can also consider paying off later, or shortening the term down, to lower your overall mortgage interest bill.’