The concept is simple: you take out a mortgage but only repay the interest monthly, leaving the capital – the amount you’ve borrowed – untouched. Meanwhile you have an alternative plan to raise the cash to repay the home loan.
Interest-only mortgages have been hugely attractive in the past to borrowers, not least because if you’re not paying off any of the capital, it cuts the cost of monthly repayments.
But the credit crunch appeared to have put the concept to rest. Bear in mind that back in 2006, before the banking crisis, there were 75 lenders eager to agree interest-only loans, according to Moneyfacts’ statistics. By 2013 there were just 12, with big lenders such as Nationwide and NatWest publicly withdrawing from offering them.
The building society still steers clear of interest-only. It says: “Nationwide has not offered interest-only mortgages since October 2012. As a responsible lender, the decision was taken due to changes to the market environment and a decline in interest-only mortgage applications.”
But the continuing low-interest rate environment we’re in is encouraging more people to switch to interest-only. Why? Ian, who has been on interest-only since graduating 15 years ago, says: “I’ve put the money I would have used to repay the capital into a medium-risk growth fund in an Isa. I reckon my investments will grow to be large enough to pay off my mortgage long before the end of my 25-year mortgage term.”
He also says he enjoys more flexibility. “If things are tight one month, I don’t make the investment. If I was short on my mortgage repayment by the same amount, the lender would be shouting about it. It leaves me with greater control of my finances.”
Lenders have woken up to the increased demand and the number now offering interest-only is 22, almost double the number in 2013. Many are also relaxing their rules slightly, having made them more restrictive in recent years.
“With new borrowing rules coming into place, lenders tightened their criteria, being specific who they lend to and who they offer the interest-only facility to,” says Charlotte Nelson of Moneyfacts.
“Alongside this, their interest-only policy was tightened so they no longer offer 100 per cent interest-only mortgages.” Instead, many offer a split repayment facility where part of the mortgage is interest-only and part repayment.