Interest-only mortgages: on the way out?

By Joel Stanier

With several lenders recently pulling the plug on interest-only mortgage deals, there are questions over whether this controversial type of mortgage has a future.

Nationwide and RBS have both stopped offering most of their interest-only deals. RBS will continue to offer a few, but the lending criteria will be much tighter. Nationwide have stopped offering them to new borrowers.

Interest-only mortgages are designed to help more money-savvy homeowners save money. The homeowner only pays the interest on their mortgage until the end of the repayment period (e.g. 25 years). Meanwhile, they must also find a 'repayment vehicle' for the actual amount borrowed (the 'capital') - normally some kind of investment fund - and this is then repaid as a lump sum at the end of the mortgage.

Because the investment fund actually gains interest, interest-only mortgage holders can pay significantly less than they would with a regular repayment mortgage.

The problem with this is that many people were offered interest-only mortgages over the last few years with no real means of repaying the capital. This is one thing that has led to soaring numbers of repossessions, leading to a glut of properties for sale and subsequently falling house prices.

But interest-only mortgages still have a place for some borrowers, says a mortgage expert at All About Money.

"Despite the problems some people have faced, interest-only mortgages have saved some homeowners a lot of money. By earning interest on part of your mortgage - instead of being charged interest - you could save literally thousands of pounds over a typical 25-year repayment term.

"However, it seems that many mortgage lenders are becoming reluctant to offer this type of mortgage, perhaps because of pressure from the authorities to make things more straightforward for borrowers.

"A fair solution would be to ensure that anyone applying for an interest-only deal has to prove they have a plan in place for repaying the capital at the end of the deal."

Some experts believe that other lenders will follow suit in removing interest-only mortgage deals from their product range, as reported by The Guardian. Stuart Gregory of Lentune Mortgage Consultancy said: "More will follow - it's just a case of how many decide to make the same change."

Tags: interest only mortgages, mortgages. property

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