An interest-only mortgage could help ease financial pressure during pandemic

Mortgage borrowers financially struggling due to the Coronavirus pandemic and considering switching to an interest-only mortgage will find that the majority of deals offer an interest-only repayment option.

Research carried out by Moneyfactscompare.co.uk found that currently, 61% of all mortgage deals have an interest-only option, an increase from 48% in March 2020. In addition to this, the percentage of all deals offering a pure interest-only product has increased from 2% in March to 3% in July.

Product counts exclude Standard Variable Rate mortgages, pure interest-only figures also exclude RIOs

Switching to an interest-only mortgage can significantly reduce mortgage repayments and could be a good option for borrowers who are severely impacted by the Coronavirus pandemic and who need a short-term reduction in their mortgage repayments. For example, someone with a £160,000 mortgage being repaid over 25 years at a rate of 2.14% (today’s average two year fixed rate at 80% loan-to-value) would make standard monthly repayments of £689.13. This would reduce to £285.33 per month on an interest-only mortgage, reducing monthly repayments by £403.80 per month.

“An interest-only mortgage could be a viable option for borrowers who have suffered financially as a result of the Coronavirus pandemic,” explained Rachel Springall, finance expert at Moneyfactscompare.co.uk. “Borrowers may well be seeking ways to reduce their monthly expenses, and an interest-only mortgage could do just that, however it is usually required for there to be a credible repayment plan in place which can entail additional monthly costs or outgoings. It is crucial then for borrowers to seek out independent financial advice to ensure it is the right option for them.”

It is important to remember that an interest-only mortgage will not repay your mortgage, which means that if a borrow only made interest-only repayments on their mortgage, at the end of the repayment term they will still need to repay the mortgage loan. As such, an interest-only mortgage is usually the best option for a short-time period and those on an interest-only mortgage should have a financial plan in place to repay the mortgage loan.

For borrowers who are unable to pay off their mortgage loan at the end of the term or who are retired and want an interest-only mortgage, a retirement interest-only mortgage (RIO) could be an option. These mortgages are specifically designed for older borrowers and enable the borrower to make interest-only repayments until the property is sold after the borrower dies or goes into permanent long-term care. While RIO mortgages are a good option for some older borrowers, those in retirement and looking to unlock some of the equity in their home could consider an equity release instead. Whichever option is chosen, careful consideration is needed before borrowing later in life and ideally the borrower should speak to an independent financial adviser first.

“Those borrowers who are considering a RIO mortgage will find 86 deals currently on the market, but it is vital they also consider equity release as an alternative as well,” said Springall. “According to a recent study by One Family, around 40% of over-55s who have an interest-only mortgage will see it come to an end over the next five years and 83 of 2,000 survey respondents may now consider equity release.”