Yahoo Finance Time for a comeback? Mortgage lenders return to interest-only
Mortgage companies are warming up to interest-only loans as several lenders have re-entered the market in the last year.
Data published by Moneyfacts, the financial analysts, showed the number of lenders offering interest-only loans increased to 33 in the last year.
This charge has largely been driven by the mutual sector with Accord (part of the Yorkshire Building Society) and the Hanley Economic, Hinckley & Rugby and Leek United building societies entering the market.
Specialist lender Masthaven has also started to offer interest-only loans.
This increase in lenders may help buck the recent trend away from interest-only. Last month data showed the number of households with interest-only mortgages had fallen dramatically since the financial crisis as lenders shied away from the sector.
Interest-only mortgages are loans where the borrower is not required to pay down the overall debt each month, instead they merely pay the interest accrued on the loan. While this makes the monthly payments much cheaper, it means the customer has to pay off the entire cost of the property at the end of the term.
However, many borrowers have got into financial difficulty as they have reached the end of their mortgage term with no way of paying off the debt.
Reader Service: Get expert mortgage advice from the Telegraph mortgage service in partnership with L & C
Ishaan Malhi, of online mortgage broker Trussle, said lenders were looking to satisfy the needs of borrowers. He said that the City watchdog, the Financial Conduct Authority, had recently loosened the rules on retirement interest-only mortgages, which would also boost the sector.
“We’ve seen an increase in the demand for interest-only mortgages, due to lifestyle changes, equity releases and niche customer situations,” he said.
“More lenders are coming back into this area to offer interest-only mortgages. Seeing mainstream lenders in this space means that the criteria has expanded, so interest-only mortgages are no longer restricted to high income earners or those with lots of equity.”
Of the big banks, Barclays, NatWest, Royal Bank of Scotland and Santander all offer interest-only loans, but only to wealthy borrowers with a large amount of equity in their properties or sizeable deposits.
Private banks also target this customer base with interest-only mortgages. Alpa Bhakta, of specialist lender Butterfield Mortgages, said that private banks were better placed to manage customers with this type of loan.
“There’s nothing wrong with interest-only mortgages, as long as the lender takes an active interest in how the loans are going to be paid,” she said.
“What makes it really difficult is when there isn’t a hands-on approach. Then you get a situation where people get to their end of their term and they haven’t really thought about how they were going to repay it. High street lenders are right to be cautious because these loans need to be more heavily monitored to make sure the customer is doing the right thing.”
adam.williams@telegraph.co.uk
