Interest-Only Mortgages Could Make a Comeback as Regulator Considers Rule Changes

Interest-only mortgages, once considered a 'ticking timebomb,' may become more accessible as the Financial Conduct Authority (FCA) reconsiders its rules to support home ownership. These mortgages were popular but nearly disappeared after the 2007-08 financial crisis due to concerns about irresponsible lending.

In a recent discussion paper, the FCA expressed interest in exploring ways to facilitate more interest-only mortgages, stating that they could help consumers who struggle with repayment mortgages and promote sustainable home ownership.

The regulator highlighted that interest-only mortgages could significantly reduce monthly payments, making them more affordable for borrowers. There are also 'part and part' mortgages available, combining interest-only and repayment components.

Prior to the financial crisis, many interest-only loans were issued without proper assessment of borrowers' ability to repay the principal. However, the FCA now requires lenders to ensure a credible repayment strategy is in place.

Interest-only mortgages accounted for 4.5% of regulated mortgage sales in 2024, down from 39% in 2007. They are commonly used by buy-to-let landlords and targeted at higher-earning professionals like barristers, accountants, and investment bankers.

Despite their past risks, some experts argue that interest-only mortgages can still be suitable for certain individuals. Recently, a lender named Gen H announced the launch of a new interest-only product, emphasizing its potential to help individuals transition from renting to homeownership and build wealth over time.

The FCA acknowledged that interest-only mortgages offer flexibility for consumers to engage with the property market. They are considering ways to allow borrowers to switch between repayment and interest-only options during the mortgage term without the need for a separate repayment vehicle.

According to the source: The Guardian.