Interest-only mortgages stage comeback

Interest-only mortgages stage comeback
There are nearly 200 interest-only mortgages for borrowers to pick from, according to recent research, nearly double the number available in 2013.

Yorkshire Building Society is the latest lender to launch interest-only products to meet the growing demand for this type of deal. The new options will be offered to both new and existing borrowers looking to borrow up to 75% of the property value.

Growing popularity of interest-only deals

Interest-only mortgages are often popular with homebuyers keen to keep monthly payments to a minimum. As the name suggests, only the interest owed needs to be repaid each month, with the remaining capital paid back to the lender at the end of the mortgage term.

Prior to the financial crisis in 2008, around 40% of all mortgages were interest-only. However, this number fell sharply following the credit crunch, with concerns being raised over interest-only lending.

Tough rules introduced following the Mortgage Market review in 2011 clamped down on this type of lending, with borrowers only able to take out interest-only mortgages if they were able to prove they had a clear repayment strategy in place.

Lenders becoming more flexible

Recent months have seen lenders become increasingly willing to lend on an interest-only basis, with some prepared to accept cash savings or the sale of the property as a way of repaying the capital at the end of the mortgage term.

However, lenders will generally limit the amount you can borrow on an interest-only basis, for example, restricting lending to a maximum of 75% or less of the property value. Others insist that property owners hold a minimum level of equity in their homes, sometimes as much as £200,000 or more, or that they earn at least £75,000 a year.

Managing an interest-only mortgage

If you’re considering an interest-only mortgage, it’s vital to have a clear repayment strategy in place so you can be certain you’ll be able to clear your debt in full at the end of the mortgage term. You should review this plan regularly to make sure you’re still on track.

There are also plenty of things you can do to reduce your debt in the meantime, even with a repayment strategy in place.

For example, most lenders allow you to make overpayments of up to 10% of the mortgage value each year, Doing this can save you thousands of pounds in interest, and help you pay off what you owe more quickly. It also means that you’ll gradually build up the level of equity you own in your property, giving you access to a wider choice of mortgage deals when you come to remortgage.

You may decide to switch some or all of your mortgage to a repayment basis at a later date. That will increase your monthly payments but will mean that the mortgage is being reduced each month.

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