Mortgage advisers point to increase in interest only business

Intermediary mortgage advisors are seeing an increase in new mortgage introductions from customers looking or interest only loans.

They say that interest only mortgages comprised 20% of new business introduced in the second quarter of 2019, down from a peak of 28% in the second quarter of 2007 but significantly higher than 15% recorded five years ago.

Repayment mortgages made up almost all of the remaining proportion of new business in the quarter, rising from 60% of business in the second quarter of 2007 to 79% now, according to the latest financial advisor tracking index from lender Paragon.

The firm says that it suggests that interest only mortgages continue to offer an effective solution for a substantial proportion of customers where a credible repayment strategy is in place.

Interest only mortgages rose in popularity in the run-up to the financial crisis in 2008 as endowment mortgages fell out of favour. However, concern that interest only products were enabling customers to purchase otherwise unaffordable properties led to the introduction of tougher checks around affordability and repayment plans as part of the Mortgage Market Review (MMR) in 2014.

Despite the increase in the proportion of interest only introductions recorded in the latest survey, regulated providers remain focused on reducing the overall number, value and average Loan to Value (LTV) ratio of the UK’s interest only mortgage stock.

In June this year, UK Finance confirmed that interest only mortgage stock had fallen by 54% in number from 3.2 million to 1.5 million and 43% in value from £399 billion to £229 billion since 2012.

‘While repayment mortgages are now by far the most popular type of mortgage, interest only continues to have an important part to play in the post-MMR environment,’ said John Heron, managing director of mortgages at Paragon.

‘For customers who can demonstrate appropriate provision for paying back the capital, interest only mortgages provide a useful vehicle for controlling costs whilst allowing customers optionality to invest and build capital elsewhere,’ he pointed out.

‘Higher LTV requirements and closer scrutiny of repayment plans however mean interest only is now a much smaller part of the overall market,’ he added.