Interest-only mortgages comprised 20% of new business introduced in Q2 2019, down from a peak of 28% in Q2 2007 but significantly higher than 15% recorded five years ago, intermediaries say.
Repayment mortgages made up almost all of the remaining proportion of new business in Q2 2019, rising from 60% of business in Q2 2007 to 79% this time round.
The latest numbers, highlighted as part of Paragon’s newest quarterly Financial Adviser Confidence Tracking Index (FACT), suggest interest-only mortgages continue to offer an effective solution for a substantial proportion of customers where a credible repayment strategy is in place.
Interest-only mortgages rose in popularity in the run-up to the financial crisis in 2008 as endowment mortgages fell out of favour. However, concern that interest-only products were enabling customers to purchase otherwise unaffordable properties led to the introduction of tougher checks around affordability and repayment plans as part of the Mortgage Market Review (MMR) in 2014.
Despite the increase in the proportion of interest-only introductions recorded in the latest FACT survey, regulated providers remain focused on reducing the overall number, value and average Loan to Value (LTV) ratio of the UK’s interest-only mortgage stock.
In June this year, UK Finance confirmed that interest-only mortgage stock had fallen by 54% in number from 3.2 million to 1.5 million and 43% in value from £399 billion to £229 billion since 2012.
John Heron (pictured), managing director of mortgages at Paragon, said: “While repayment mortgages are now by far the most popular type of mortgage, interest-only continues to have an important part to play in the post-MMR environment.
“For customers who can demonstrate appropriate provision for paying back the capital, interest-only mortgages provide a useful vehicle for controlling costs whilst allowing customers optionality to invest and build capital elsewhere.
“Higher LTV requirements and closer scrutiny of repayment plans however mean interest-only is now a much smaller part of the overall market.”
