Popularity of interest-only mortgages decreases

Approvals for interest-only mortgages have fallen by nine per cent over the past six years despite the number of products available nearly doubling.

Interest-only mortgages allow borrowers to pay only the interest on the loan during the life of the mortgage and then repay the full capital when the mortgage term ends.

Data from Moneyfacts found that the amount of interest only mortgage products on the market increased from 102 in May 2013, to around 200 products in 2019.

However, figures from the Financial Conduct Authority and the Bank of England have shown that this has not led to a higher number of interest-only approvals, with the number of consumers taking out interest-only policies dropping by 9.1 per cent over the past six years.

The decrease comes as overall residential mortgage approvals have increased by 76 per cent in the same period.

Darren Cook, a finance expert at Moneyfacts.co.uk, said: “These figures suggest that although borrowers are still able to locate potential suitable interest-only mortgage products with around a third of all residential mortgage products offering interest-only as a repayment method.

“Tighter rules and stricter lending criteria following the aftermath of the financial crisis may be leading to a lack of appetite for this sector.”

It is believed that the decrease in interest-only deals stems from a rise in consumers concerned they will be unable to pay back the cost of the house.

The FCA reported at the start of 2018, that nearly one in five mortgage customers had an interest-only mortgage and announced it was concerned that troubles in repayment plans could lead to people losing their homes.

According to UK Finance, there are around 1.7 million interest-only mortgages totalling about £250 billion outstanding in the UK with about 200,000 policies due to mature by 2020.

Many interest-only borrowers have been classed as mortgage prisoners because they found themselves trapped in their policies after the financial crisis as banks were less keen to take such customers on.