For regular borrowers?
The interest-only mortgage market seems to have taken a full turn. From being a mortgage product that suited low-earners as well as those with irregular income patterns, it is now becoming a product only available to the very wealthy, and with such strict criteria to meet application requirements, that it is often difficult even for those with cash and assets to obtain an interest-only deal.
The decline of interest-only
If you look as far back as the 1980’s, the rise of interest-only mortgages allowed first-time buyers to enter onto the property ladder, with a fairly modest income. In 1986 alone, 456,000 interest-only mortgages were advanced, according to recent data released by Council for Mortgage Lenders (CML).
In 2007, just over 104,000 interest-only mortgages were issued to first-time buyers, which further declined by another 50% in 2008, resulting in just 45,000 new loans of this nature issues during that year.
Further still, by 2014 just 1,700 interest-only arrangements were made, and only 200 in quarter 2 of 2015. This equates to less than 2% of figures in 2007.
The market was very different in the 80’s, with the popularity of endowment mortgages, however, such a decline, and complete turn for the books is unusual when comparing financial products.
Tightening the ropes
Many experts say that tightening the rules was inevitable, and essential, especially in light of the financial crash of 2007. Borrowers were only interested in obtaining the property and not focused enough on how they would pay back the capital at the end of the loan term.
Even now, those handful of borrowers left on an historical interest-only mortgage are a concern to lenders, for the feasibility of repayment.
Citizens Advice estimated that 1.7 million borrowers with an interest-only mortgage outstanding have no repayment vehicle, and 934,000 of these are without a repayment plan. 433,000 haven’t even thought how they will repay the capital proportion.
Read more – Interest-only mortgages are a ticking time bomb
To this extent, it is no surprise that regulators are putting in measures to ensure that wider issues don’t crop up further down the line.
What you need to get an interest-only mortgage
To use an example, Natwest launched a new interest-only mortgage in September 2015 (Mortgage Strategy), after a three year absence in this market. The requirements of obtaining the loan include a £100,000 income, not including bonuses, and 75 percent loan-to-value (LTV).
In light of the fact that the average salary for the UK features around £26,000 (Trading Economics) this means a four times above average income sets the bar now for access to the interest-only mortgage market.
This example is not alone. Other high street lenders have similar arrangements, with high requirements for entry and either 75 percent or 50 percent LTV.
Just for borrowers with high-net worth
Most lenders now want evidence of a repayment vehicle and this varies between lenders. Some won’t allow pensions and others won’t allow the future sale of property.
Really now, except for the few anomalies, interest-only mortgages are available just for high-net worth individuals. Many of this profile of borrowers favour interest-only to match their irregular income streams and their lifestyle choices.
For those with high income, assets, pensions and the like, as well as a plan for repaying the capital, are still likely to be able to find an interest-only arrangement. For first-time buyers though it looks like this ship sailed.
Read more – Are interest-only mortgages on their way out?
Dental & Medical Financial Services are specialist mortgage advisers to the dental and medical profession. If you are a high-net worth individual interested in interest-only mortgages, Chris can help talk through your options.
Tel: 01403 780 770