Interest-only mortgages are becoming the preserve of the rich.
Just over a million homeowners pay some or all of their residential mortgage on an interest-only basis and most of these will have taken their loans out before the financial crisis. These deals, where borrowers do not pay back the balance of what they owe, fell massively out of favour in the credit crunch, but lenders have started offering them again — to a special few who are wealthy enough to qualify.
Banks have become keen to lend to richer homeowners who want to borrow cheaply to free up cash for other investments such as stocks and shares or second homes.
Record-low interest rates make it possible to borrow up to £2 million at less than 1 per cent on an interest-only basis. More than 70 lenders offer these deals, but they are very selective about who can qualify.
Nationwide has a 0.91 per cent two-year fixed rate for remortgages or homemovers, but caps interest-only lending at 25 years, or retirement, and requires borrowers to earn £75,000 as a single applicant or £100,000 for a couple. The fee is £1,499. A £1 million interest-only loan at that rate would cost £783.33 a month as opposed to £3,741.63 for repayment. You can borrow £2 million at 1.14 per cent fixed for two years with no fee.
Advertisement
Interest-only mortgages are more common in the buy-to-let market because lenders know that landlords could sell the rental property to redeem the loan.
Homeowners with interest-only deals will need to demonstrate a way to pay off the debt — perhaps by selling their home, personal savings, or the sale of a business.
Usually, you will be required to own at least 40 per cent of your home and earn at least £75,000 for even part of your mortgage to be repaid on an interest-only basis. Coventry Building Society, which re-entered the market last year after a decade of repayment-only deals, requires borrowers to have £300,000 equity in the property and to borrow no more than 50 per cent loan to value. Dudley Building Society allows you to repay the loan by selling “tangible assets” such as jewellery, fine art or classic cars.
Coutts will let borrowers make “bullet payments”, which suits workers who earn bonuses, such as bankers. NatWest requires interest-only borrowers to earn £100,000 and part-and-part borrowers £75,000.
Aaron Strutt, from the mortgage broker Trinity Financial, said: “Most of the lenders are doing interest-only because it’s what people want. They don’t want to lose business from borrowers on bigger salaries wanting bigger mortgages.”
Advertisement
About half a million interest-only mortgages worth about £62 billion are due to mature in the next six years, which means that by 2027, homeowners will have to pay off the whole of their debt unless they can extend their term.
Workers who earn bonuses every quarter may plan to pay down the debt at intervals, while still being able to keep monthly repayments low.
There were 908,000 residential interest-only loans in 2020 and 277,000 part-interest-only part-repayment deals worth a combined £198 billion, according to the trade body UK Finance.
The number of interest-only deals fell 11 per cent in 2019-2020, but the amount of outstanding debt was down only 8 per cent. While there was a 13 per cent fall in the number of borrowers paying part of their mortgage as interest-only, the amount borrowed fell 2 per cent. This suggests that those who get a deal are taking out larger mortgages.
Nova Molloy, a mortgage broker, said only a very small minority of her clients went for interest-only. “We get a few inquiries from older people, but they tend to opt for equity release. Only clients with high earnings and an ability to repay will opt for interest-only.”