The increased demand for interest-only mortgages

You’re looking for a new home, you’ve trawled the estate agent’s particulars, and you’ve narrowed your choice to a small handful that are worth looking at.

But how do you know that you can afford the payments on mortgage loan you will want to take out on whichever one you choose? 

As someone who keeps a keen eye on ensuring your financial outlay is as low as possible, you’ll no doubt be looking for the best deals to keep tight control of the costs associated with the whole moving process.

The choice of mortgage product is particularly important at a time when mortgage rates have been the highest they’ve been for over a decade. As a cost-conscious home-buyer, you will want to understand how to minimise the monthly amounts you pay.

The options are not that easy to identify as the mortgage market has thousands of products, each with different advantages and drawbacks. The sheer enormity of choice can be overwhelming and bewildering.

Looking for help and guidance – without forking out any money

There are firms who keep a weather eye on the market demand over monthly, quarterly and annual periods. The data they use might be physical information on products taken up, or the wealth of data used in the popular search engines – specifically certain keywords input by users.

One such company is Legal & General, which has recently issued findings from research into the mortgage market, showing a definite spike in demand for interest-only mortgage products., based on search data for the month of July 2023.

Data from Legal & General Ignite, the free mortgage research and sourcing platform, shows:

  • Searches for interest-only mortgage products rose by 11% between June and July
  • Interest in “non-traditional” construction and energy-efficient homes also increased by 9% over the same period

As Jodie White, Head of Mortgage Products & Transformation, Legal & General Technology, commented: 

“The uptick in searches for Interest Only mortgages certainly characterised July and can be linked to the announcement of the Mortgage Charter the month prior. 

“Borrowers are leaning on this support as the market continues to grapple with the new interest rate environment and wider cost-of-living pressure. 

“We have since seen swap rates and interest rates stabilise, providing hope for more positive August and September figures. 

“With many of us returning from a well-deserved summer break, it is an opportune time for advisers to reassess the technology at their disposal to help line up a successful final quarter.”

Looking into interest-only mortgages further

Interest-only loans are a good way of significantly reducing monthly repayments. Because the monthly outlay is much lower than on a standard repayment mortgage, your home is better protected from the potential risk of repossession. 

As the name of the loan implies, you will only be obliged to pay the amount of the accrued interest on the loan each month, rather than the interest plus a large amount to shave off the total mortgage amount.

However, there is a sting in this particular tail since, at the end of the period of the loan or whenever you sell the property, you will be required to pay the full lump sum remaining of the mortgage in one go. 

And, because the risk is higher to the lender, the total of the interest paid on an interest-only mortgage will necessarily be higher than the total you would have paid on a standard repayment mortgage.

However, with judicious management, you can also look into putting money into an interest-yielding account to service that final lump sum payment when it comes. 

This means that you will end up with a sum of money that might cover the larger interest payments each month, while having the flexibility to either put more money in the pot, or even not paying into it if finances are particularly constrained that month, without having to pay a penalty to the lender.

If you are looking at a way of minimising your monthly payments, an interest-only mortgage might be the way to move forward with your house purchase. 

It’s certainly worth looking into as a way of saving money now.