The number of interest-only mortgages open to individuals who are interested a home to live in has nearly doubled in the past six years, according to new research from finance data provider Moneyfacts. But could you really acquire one?
In May 2013, there were 102 ‘residential’ interest-only mortgages available. By May 2022, this had risen to 193.
These kinds of mortgages are prominent within the buy-to-let market, however for people seeking to pay off just the interest on a loan for a home they reside in, it’s much tougher to obtain a deal.
Despite the rise in the number of deals, Moneyfacts found that the approval rate for interest-only mortgages fell between 2013 and 2022, with stricter rules on affordability hampering people’s likelihood of taking out such a loan.
Which? explains the most recent in the residential interest-only mortgage market, how you might get this kind of loan – and also the pros and cons of borrowing in this manner.
Interest-only mortgage approvals fall
The most common kind of residential mortgage is a ‘repayment’ mortgage, which sees you paying off both interest you’re charged in your mortgage loan, and area of the loan itself every month.
Interest-only mortgages only require you to remove the interest. This means repayments are lower, however, you will have to remove the entire loan at the end of your mortgage term.
Acceptable repayment techniques for many residential interest-only mortgages include a savings plan, an investment portfolio, a pension or other assets you intend to sell.
Approvals of these kinds of deals fell by almost 10% between your oncoming of 2013 and the end of 2022. This decrease is much more significant poor approval rates for all residential mortgages, which rose by around 75% over the same period.
Despite this tumbling acceptance rate, there are a huge number of mortgage products provided with an interest-only repayment method.
While you will find 193 mortgage products that are exclusively available as interest-only, the entire quantity of residential mortgage deals that allow interest-only payments as an choice is 2,265 – nearly half the entire quantity of products available on the market.
Can I get an interest-only mortgage?
We asked David Blake from Which? Mortgage Advisers for his expert undertake the stop by interest-only mortgage approvals.
He told us: ‘Nowadays, lenders are more wary of putting someone in a position where they would be unable to pay back their interest-only mortgage.’
This has led many lenders introducing have tougher affordability requirements for interest-only mortgages. Based on David, lenders are more likely to approve you to have an interest-only mortgage if you:
Interest-only mortgages for landlords
Although Moneyfacts’ new information pertains to residential mortgages, interest-only deals are far more apt to be offered to buy-to-let landlords.
This happens because rental income can cover monthly interest payments, along with a landlord sell a house after their term to settle the loan.
Find out more within our full guide to buy-to-let mortgages.
What are retirement interest-only mortgages?
If you'll need a residential interest-only mortgage, perhaps because you curently have the one that is nearing no more its term and you’re likely to be unable to remove the balance, a brand new kind of product called the retirement-interest only mortgage (RIO) may work for you personally.
Of the 193 residential mortgages which have interest-only because the only repayment option, 43 are RIOs.
Unsurprisingly, these items need you to be in or approaching retirement, in most cases over 55.
Most RIOs work just like other interest-only mortgages, but the repayment vehicle will be the sale of your dwelling when you die or transfer to long-term care. This means the affordability criteria may not be as strict.
Is an interest-only mortgage advisable?
Since residential interest-only mortgages is really so difficult to secure, is it actually worth trying to get one?
Here are a couple of the advantages and disadvantages. For additional a closer look, see our full interest-only mortgage guide.
Pros:
Cons:
Lenders tend to be more cautious about approving residential interest-only mortgages, which means you should only make an application for an interest-only mortgage if you’re sure you will be able to.
Popular repayment methods include selling your home and downsizing, selling investments, and using savings.
But as David Blake told us, ‘the only way to guarantee a mortgage is paid off is by going for a repayment mortgage’.
If the value of your home decreases, for example, selling it might not cover the price of your loan.
David advises a person with an interest-only mortgage to make overpayments whenever they can.
Overpaying on an interest-only mortgage means deciding to pay back more than just the interest, and for that reason chipping away at the actual loan balance. This makes it simpler to repay it when your term ends.
