Could borrowers return to interest-only in 2020?

People looking for a new mortgage deal could be considering an interest-only option, particularly if they have undergone a change of circumstances due to the Covid-19 pandemic, according to research from Moneyfacts.

Related topics:  Mortgages
Rozi Jones
6th July 2020
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"An interest-only mortgage could be a viable option for borrowers who have suffered financially as a result of the coronavirus pandemic."

61% of all mortgages now allow an interest-only option as an alternative to the conventional capital and interest repayment method, up from 48% in March.

However, pure interest-only mortgages remain a very niche area of the market, totalling just 77 products, or 3% of all residential mortgage products.

Rachel Springall, finance expert at Moneyfacts, said: “The nosedive in the number of residential mortgage products has been as clear as day, with higher loan-to-value options taking a huge hit, but there still remains a healthy portion of deals for borrowers who may wish to take advantage of an interest-only repayment. Savings rates are at record lows and so if some borrowers have more disposable income, they may wish to pay off their debt rather than to save.

“An interest-only mortgage could be a viable option for borrowers who have suffered financially as a result of the coronavirus pandemic. Borrowers may well be seeking ways to reduce their monthly expenses, and an interest-only mortgage could do just that, however it is usually required for there to be a credible repayment plan in place which can entail additional monthly costs or outgoings. It is crucial then for borrowers to seek out independent financial advice to ensure it is the right option for them.

“The number of pure interest-only mortgages designed for specific types of borrowers remains limited. Unlike the financial crash, where consumers may well have got into financial difficulty having taken out an unsuitable deal that subsequently became unaffordable, there are more checks in place today thanks to the Mortgage Market Review (MMR).

“Those borrowers who are considering a retirement interest-only mortgage will find 86 deals currently on the market, but it is vital they also consider equity release as an alternative as well. According to a recent study by One Family, around 40% of over-55s who have an interest-only mortgage will see it come to an end over the next five years and 83 of 2,000 survey respondents may now consider equity release.

“In recent years, the number of borrowers on an interest-only mortgage has fallen, by 8.9% between 2018 and 2019, and both the total number of interest-only mortgages and their value have fallen by half since 2012, according to UK Finance. However, there could well be borrowers struggling to meet their monthly commitments right now who want to switch to an interest-only mortgage over the short-term, as well as borrowers coming off an interest-only deal in 2020. In fact, there is expected to be 54,000 interest-only mortgages due to mature this year, and these borrowers will need to be catered for if they have outstanding debt.

“According to Legal and General Mortgage Club, there was a significant rise in broker enquiries about interest-only options between April and May 2020. Interest-only searches by advisers were the third-highest search in the first week of May. As borrowers come off mortgage payment holidays, more consumers could be debating an interest-only option and using an independent financial adviser is a wise choice to find the most appropriate deal during these challenging times.”

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