Interest Only Mortgages

1. Are interest-only mortgages becoming a niche?

Many years ago lenders made it easy for younger people to climb onto the property ladder by offering interest only mortgages.

As we have seen, house prices rose year after year and many people thought that purchasing a house was a solid investment, and this in turn will help those who have an interest only mortgage would be able to repay the capital by selling their house and downsizing.

Then overnight, we were hit by the financial crisis, this had a huge knock on effect on the property market and left many people in negative equity. This crisis inevitably had a knock on effect on those applying for mortgages or wishing to purchase a house. It did make it harder for people to get onto the property market.

What is an interest only mortgage?

Interest only mortgages are where a household only pays off the interest on the loan amount monthly but not the capital. At the end of the mortgage term, the borrowers of the mortgage are expected to repay the capital.

The initial attraction to interest only mortgages was that many of the first time buyers could save for the repayment capital and also rely on the rising value of their home. Another benefit was that the interest rate was cheaper than the repayment option. As this method become more and more popular the city regulators– the Financial Services Authority (FSA) started to pay close attention and determined that many people with interest only mortgages did not have solid plans in place to repay the loan amount.

At the mortgage industry conference, it was mentioned; ‘that there was a place for interest only’ mortgages however lenders must ensure these mortgages are taken out by people whom have a concrete repayment plan.

In recent years the market for interest only mortgages has changed dramatically changed and is becoming more of a niche product.

All my buy to let mortgages are interest only as I want o maximise the monthly cashflow.

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