The decline of interest-only mortgages

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It is estimated that over a million interest-only mortgages will mature over the next few years, says a November 2016 article.

There is a fear that many interest-only mortgage holders will not be able to repay the capital amount at the end of the mortgage period.

Many interest-only mortgages were arranged in the 1990s when there were fewer lending restrictions than there are today. Attracted by low mortgage repayments, many borrowers did not have a strategy for repaying the capital part of the loan when it matured.

Since 2012, the number of interest only mortgages has declined. Any that are offered have stringent conditions. Most lenders will only lend 50% or less of the value of the property on an interest-free basis. Borrowers also need to earn a salary of at least £50,000 to £100,000 a year. Some lenders will only lend an interest-only loan if the borrower has at least an £150,000 equity ownership of the property.

Some lenders do not have any set criteria for interest-only mortgages, but look at each application individually. Other lenders have pulled out of the interest-only mortgage market altogether.

Although mortgage brokers can arrange interest-only mortgages, they are now a small sector of the market. A borrower considering an interest-only mortgage needs to have a clear strategy for repaying the loan when it matures. High earners with interest-only mortgages should take out mortgage protection insurance to cover the event of temporarily losing their income due to illness or injury.

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