The interest-only mortgage option was seen as a credible path for many prospective home-owners to get on the housing ladder, but still keep their repayments at an acceptable level. There are two ways to repay a mortgage: capital repayment and interest-only repayments. With an interest-only mortgage, the monthly payment goes towards only the interest charges on the loan and does not impact any of the original loan borrowed. This means that the actual payments will be less than on a repayment mortgage, but at the end of the term the borrower still owes the original amount borrowed from the lender. This is usually repaid from profits from a house sale or through a specialist endowment policy that was built up specifically for the purpose. With a repayment mortgage, the borrower pays back a small part of the loan and the interest each month. If the borrower makes all of their payments, they are guaranteed to pay off the whole loan at the end of the term.
The interest-only mortgage has been criticised in the past because it relies on a property generating a profit on sale to both repay the mortgage and give the seller sufficient funds to either buy another house outright or put a deposit down on one. However, house prices are not guaranteed to rise consistently, and the market has seen significant falls in value with recessionary periods. That can leave the mortgagee in negative equity and unable to pay off their mortgage. But many banks point out that the old perception of interest-only mortgages doesn’t fit todays society, and the new breed of deals are far more attractive and for the right individual can offer some great levels of flexibility.
In response to the market pressures, the number of lenders offering some form of interest-only mortgage is rising, and includes many high-street names, and they are offering mortgages that have a high degree of flexibility, particularly on the means of repayment. It used to be that if a borrower took out an interest-only mortgage, they would have to show proof that they had an endowment policy to run beside it. This policy would be paid into with the same regularity as the mortgage and after a normal term – say 25 years – would yield sufficient money to repay the original loan.
But endowment policies are linked to investment returns and the low levels of interest rates and instability in stock markets mean that these policies can struggle to reach their end goal. Therefore, on the latest range of products, lenders are being more flexible and allowing repayment by other means as well. These other vehicles can include cash saved in a savings account, certain types of ISA, company stocks/shares, pensions, investment bonds, unit trusts, regular savings plans, and even other properties or assets that the borrower may have. There may even be provision to use combinations of these too. This new flexibility is making interest-only mortgages increasingly more attractive to both borrowers and lenders and is helping many secure deals they may not have been able to achieve otherwise.