After the US sub-prime mortgage market crashed in 2007 there was a move by regulators to “discourage”, effectively ban, large interest only mortgages in all but name. Dubbed a “ticking timebomb” by the Financial Services Authority (the predecessor to the modern day Financial Conduct Authority) they were seen as toxic. However, after redefining their mortgage lending criteria a number of banks have re-entered the large interest only mortgages market with a new focus – HNWIs.
We think that large interest only mortgage are a vital part of the high net worth lending market. Today, many lenders offer interest only as standard and many more have sensible criteria which if navigated correctly can provide excellent results.
Historically, interest-only mortgages were a useful means of purchasing high-value properties funded by relatively low monthly payments. In essence, delaying repayment of the capital until the end of the mortgage, and only covering interest each month had a positive impact on cash flow. For many people the idea was to take advantage of the UK housing boom, re-mortgage on a higher value, repay the initial mortgage, bank a profit and the cycle began again. If you compare interest only mortgages on the market today, you will see a wide variety of terms.
The old model depended on a strong UK economy, positive wage growth and above all a continued upward trend in UK property prices. When this came to a shuddering halt in 2007 many banks experienced mortgage defaults, significant write-offs and were left with properties they did not want. However, in recent times we have seen a significant change in this approach with large interest-only mortgages now targeted towards HNW individuals, specifically those with high incomes.
While there is a growing appetite for interest-only mortgages for those on relatively high incomes, there are significant variations on interest-only mortgage LTV ratios. Depending upon the individual’s financial status it may be possible to arrange a large interest-only mortgage on an LTV ratio of anywhere between 50% and 75%. The less risk for lenders the more favourable the terms but even a 25% deposit, supported by an appropriate level of income, offers a degree of safety for lenders.
This type of mortgage arrangement is proving to be particularly popular amongst those on high incomes and high bonuses, as well as those of self-employed status. As these individuals tend to have fairly irregular income patterns, the backbone of their mortgage is the interest-only element. There is also the option to pay down capital upon receipt of additional funds from employment or asset sales. So, while the initial interest-only arrangement will assist with short-term cash flow it also offers the opportunity to make additional payments.
Any additional payments made towards the capital element will result in lower long-term interest charges therefore further improving cash flow. For many of our customers it is the flexibility of this scenario which is most attractive.
Despite long-standing reservations about interest-only mortgages amongst mass-market financiers, there is a growing appetite for large interest-only mortgages for HNWIs. Many of those seeking interest-only mortgages often have relatively complex financial situations around which specific mortgage deals need to be negotiated. This is where we come in, researching and negotiating the best deals for our clients, tailored to their individual needs.
While our core strengths remain research, negotiation and long-term relationships with our customers, we are also independent and not tied to any particular parties. This gives us access to more than 250 lenders in the large interest-only mortgage market, many of whom we have dealt with numerous times in the past. Our ability to arrange large interest-only mortgages which offer a degree of certainty to lenders as well as a degree of flexibility to customers suits all parties. We would welcome the opportunity to discuss your particular needs and provide a no-obligation market quote which best suits your situation.