The potted history of interest-only
David Lownds (pictured) is head of marketing and business development at Hanley Economic Building Society
To say that interest-only has had a chequered history is somewhat of an understatement. From being the mortgage product of choice for many in the pre-credit crunch days, it has since been widely avoided by many lenders and borrowers. Although after reaching a low point in 2016, it is once again showing signs of a comeback.
A potted history
Interest-only was, and maybe still is, an emotive topic for many. There are valid arguments to suggest that it was widely abused in the past. On the flipside, it was also a product which allowed large numbers of borrowers onto the property ladder who were unable to do so otherwise, many of whom have benefitted from being able to carry equity into their next property purchase, but there are also others who have become mortgage prisoners as a result.
So where are we now?
In May, we saw data from Moneyfacts highlight the fact that the number of interest-only mortgage products had almost doubled over the past six years, rising from 102 products in May 2013 to a figure of 193 products. However, this increase hasn’t led to a greater number of approvals of this product type, despite overall mortgage approvals nearly doubling over the same period. Figures released by the FCA and the Bank of England showed that approvals for interest-only mortgages fell from 26,592 in the first quarter of 2013 to 24,148 in the fourth quarter of 2018.
It was also interesting to see the latest figures from UK Finance show that the number of interest-only mortgages fell by 13.1% in 2018 compared to the previous year. This means the total number of pure interest-only mortgages has now fallen by over half (54%) in the past seven years, from 2.5 million in 2012 to 1.23 million in 2018. In addition, the number of interest-only mortgages due to mature in 2019 and 2020 also fell significantly (41.9%) from 217,000 to just 126,000.
The latest reduction follows an industry-wide commitment by regulated mortgage lenders to contact all interest-only borrowers with loans scheduled to mature before the end of 2020. This is a huge positive and highlights the good work done by many proactive lenders in helping keep more homeowners on the right track to repaying their loans or working out alternative solutions.
But what does the future hold?
Yorkshire Building Society recently added an interest-only repayment option to its direct mortgage range. This was an interesting move which helped demonstrate how stricter lending criteria – as introduced by the regulator – still offers enough leeway for a responsible interest-only offering.
After all, it’s not like there is no longer a need for this product type, despite all the negative headlines. The fact remains that the mortgage world is in a very different place from the dark days of the credit-crunch. Some borrowers, quite rightly, remain wary of interest-only but this only serves to highlight the importance of the advice process and being able to illustrate – and keep to – an acceptable and robust repayment strategy.
Will more lenders dip their toes in the interest-only waters?
It remains to be seen, but if demand from borrowers and the intermediary market continues to rise then it would certainly not surprise me – provided such options are responsible and truly reflect the needs of the borrowers.
So, watch this space.