Interest-only mortgage deals in decline

Interest-only mortgage deals in the mainstream residential market are in decline, research from Paragon Mortgages has revealed.

Paragon's Fact research, a panel-based survey of over 200 financial advisers, shows that interest-only accounted for 23% of mortgages introduced by advisors during the third quarter of 2008. This was down from 26% in the first quarter of the year and the second survey in succession that has shown a decline. Prior to this, the last recorded fall in the proportion of interest-only mortgages was in the first quarter of 2004.

Conversely, repayment deals have risen after a long period of decline. Repayment deals accounted for 60% of mortgages introduced in the third quarter. Repayment mortgages had been in decline since they peaked at 70% during the fourth quarter of 2001.

Borrowers are also looking for security by opting for fixed-rate deals. Nearly half (49%) of mortgages introduced by the panel advisers during the third quarter were fixed-rate deals, compared with 46% in the first quarter. Base Rate tracker deals remained unchanged over the period at 40%, although it is expected that the popularity of these deals will grow due to cuts in Base Rate.

Borrowers opting for fixed-rate deals were increasingly looking for security by choosing longer-term loan deals. Financial advisers were asked to rate the popularity of different fixed-rate terms, and although two-year fixed deals remain the most popular, three-year term deals were not far behind. The popularity of five and 10-year fixed-rate mortgage deals were also higher than the same period last year.

John Heron, Paragon Mortgages' managing director, says: ‘We have seen lenders become far more cautious over the past 12 months and less prepared to lend to customers on an interest-only basis. At the same time, borrowers are also looking for security and are locking themselves into long-term fixed-rate deals.

‘I'm sure a number of those that took out a long-term fixed-rate at the start of the quarter are regretting the decision following the recent Bank of England Base Rate cut, but at least they will know exactly what their monthly mortgage payment will be for the chosen period. There are advantages and disadvantages to long-term fixed-rate deals and borrowers need to be comfortable with the length of time that they are signing up for.'