‘Healthy portion’ of interest-only mortgage deals remain on market

There is still a “healthy portion” of interest-only mortgages on the market for borrowers to choose from, despite the number of home loans available generally having shrunk back sharply, analysis has found.

Interest-only mortgages allow borrowers to pay off the original amount borrowed only when the loan comes to an end. In the meantime, they just pay off the interest.

This means monthly payments will be lower than on a repayment mortgage – which could help those whose finances have been hit by coronavirus.

But lenders will have strict criteria in place for those who want to take out a deal. Borrowers will be expected to have a plan in place to pay off the capital at the end of the loan and they will often need a hefty deposit.

Interest-only loans generally have become thinner on the ground in recent years than they once were, as after the last financial crisis it emerged that many borrowers had deals in place with no obvious way of eventually repaying the debt. There was a clampdown on interest-only mortgage lending and toughened rules were introduced.

Financial information website Moneyfacts.co.uk said most mortgages on the market now allow an interest-only option as an alternative to capital and interest repayments, but pure interest-only mortgages remain a niche area of the market.

Analysis from Moneyfacts.co.uk found there were 77 purely interest-only mortgage products on the market in July, down from 118 in March.

In total, 1,666 mortgage deals on the market in July offer an interest-only option, down from 2,533 in March.

Across mortgage products generally, the number of deals in July was around half the levels seen in March, with 2,728 residential deals now to choose from, compared with 5,231 in March.

Rachel Springall, a finance expert at Moneyfacts.co.uk, 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.”

She continued: “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… there are more checks in place today thanks to the Mortgage Market Review (MMR).”

Ms Springall added: “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.”