Research sheds light on interest-only mortgages

Research published by the CML concludes that there is no evidence for the widely-held assertion that housing affordability pressures are driving borrowers to take out interest-only mortgages without having a plan for repaying the amount borrowed.

The research, which focuses on comparisons between borrowers who take out repayment (capital-and-interest) and interest-only mortgages, shows that:

interest-only borrowers take out loans with similar or slightly lower income multiples than those opting for capital-and-interest mortgages; first-time buyers, who face some of the most acute affordability problems, are less likely than other borrowers to take out interest-only loans (17% of first-time buyers choose an interest-only mortgage, compared to 25% of home movers); and interest-only borrowers typically have a similar ability to repay as those taking out repayment mortgages.

The research says that interest-only loans are particularly attractive to borrowers with uneven streams of income. The self-employed, contract workers and those receiving substantial bonuses can choose to minimise their regular monthly payments with an interest-only loan and use 'peaks' of higher income to make ad hoc capital repayments.

The research also shows that where individual interest-only borrowers have past credit problems and higher loan-to-value ratios, this is often mitigated by having larger incomes overall or borrowing less relative to income.

Commenting on the research, CML director general Michael Coogan said: "The view that interest-only mortgages are being used as a dangerous short cut around affordability barriers is not borne out by our research. But we do need to understand as much as we can about why borrowers choose them, and what they do after they have taken out their loan. We are therefore pleased that the Financial Services Authority has been undertaking consumer research, and look forward to reading their findings when they are published next month."