Interest-only mortgages have been on a rollercoaster in the last 30 years that shows no sign of slowing down.
Mortgage brokers say another comeback is on the cards after a market exodus in 2012 as lenders take their first steps towards new product lines.
Santander and Leeds Building Society have loosened their criteria, while NatWest Intermediary Solutions is reviewing its product range.
From next year, Santander will offer interest-only customers the option of continuing the deal until they die when the bank will sell the property.
Last month, Leeds Building Society launched a new range of 50 per cent loan to value deals for interest-only.
Moneyfacts data shows 21 lenders offer interest-only today compared to just 10 last year, the first shift in reversing a seven-year decline.
However, it remains a far cry from the halcyon days of 2007 when 79 lenders were offering interest-only. The number has steadily declined until this year, with 64 lenders in 2008, 55 in 2009, 45 in 2010, 37 in 2011 and 32 in 2012.
Your Mortgage Decisions director Dominik Lipnicki says: “Things are getting slightly better but nowhere near enough.
“Interest-only has become a dirty word like self-cert and while we would never want the return of self-cert, interest-only has a place. They are the perfect solution for plenty of people but they are unable to get them. We are still saying no on a daily basis to people who should be getting deals.”
Interest-only has been around for years as an innovative, niche product designed as a flexible way to pay for your mortgage.
They were popularised in the 1980s alongside a growth in mortgage endowment policies.
Mortgage endowments were notoriously embroiled in a monster misselling scandal and have become the lepers of financial services – but interest-only deals survived.
In the late 1990s they evolved and became much more popular. Instead of using endowments, borrowers began using all sorts of incredible repayment strategies from savings to future inheritance.
But as the housing boom gripped Britain in the 2000s, one strategy took hold above all others: house price growth.
The idea is simple: take out a loan and only pay the cheap interest payments each month. Watch the price grow, then cash in the profits without ever having paid a penny towards the capital. For some it had mutated into a risky investment product rather than a mortgage loan.
The problem is simple too: house prices can go down as well as up, and they plummeted spectacularly as the financial crash hit Britain. Some borrowers were left with no way of paying back hundreds of thousands of pounds.
At the time of the crash almost three million Britons were on interest-only deals – ballooning far beyond their original niche role.
Lenders and the regulator belatedly began to take note. The Mortgage Market Review decreed interest-only loans could only be dished out if there is a “clearly understood and believable” capital repayment strategy.
Telos Solutions director Richard Farr says: “The problem with interest-only mortgages has always been proper use of them, rather than the product itself being good, bad or indifferent. It relies on client circumstances and depends what the borrowing is for.”
But lenders took their cue and piled out of the market. In 2012, Nationwide Building Society, NatWest Intermediary Solutions, Accord, Coventry BS, Newcastle BS and Manchester BS quit interest-only. Virtually every other lender imposed major restrictions on their criteria: it vanished overnight.
Lenders blame the regulator, but they were also concerned about their own exposure to risky interest-only deals already on their books.
FCA chief executive Martin Wheatley has previously described the number of interest-only mortgages in the UK as a “ticking timebomb”.
In one of his first acts as chief executive, Wheatley conducted a thematic review showing nearly 1.5 million interest-only customers – 48 per cent – had no repayment plan.
The FCA told lenders to get in touch with customers on a regular basis to nudge them into repayment strategies.
Whether this is enough to stem the fallout remains to be seen but now the dust is settling on the crash and the MMR, lenders are getting their groove back.
Treasury select committee member and Conservative MP Mark Garnier compares paying interest-only to paying rent and the loan repayments with a savings plan.
He says: “You’re always renting a property either from a landlord or a mortgage lender. Another way of looking at interest-only is that cost of funds is your cash flow and the repayment element is your savings plan. When you separate them then why would you always slavishly look for a repayment mortgage?
“If you can come up with a sound savings plan that the mortgage provider is comfortable with then I am perfectly happy with interest-only mortgages.”
Garnier suggests flexible lending policies could allow future downsizing of property as an acceptable repayment plan.
He says: “Relying solely on house price inflation is banned as a repayment method and it should always have been. The key is always the repayment plan. As long as individuals has a sound repayment plan that is sound then there is nothing wrong with interest-only mortgages.”
Farr says lenders should be offering more flexible interest-only deals, such as half repayment and half interest-only, and innovation of this sort could be the key to reviving the market.