Why the future looks interesting for Interest Only
National Intermediary Development Manager Mark Collar discusses the growing appeal of Interest Only in the mortgage market and suggests the kinds of buyers likely to choose IO or Part & Part products.
Interest Only mortgages were popular in the run up to the recession and although a decline in the size of this market has been seen since, CML data shows that residential Interest Only loans still represent a significant proportion of lending stock - £283bn, which is almost a third of the market. To provide a comparison, Buy to Let stock stands at £214bn.1
The dynamics of today’s Interest Only market are very different to that of the past, with the £12bn of new lending in 2015 primarily consisting of home movers and those re- financing.2 In contrast, the relatively small proportion of those using this repayment method for the first time now represents a much more affluent demographic.3
We believe the Interest Only market represents a significant opportunity for mortgage intermediaries. Fewer lenders are offering these kinds of mortgages and as a result, consumers need professional advice from brokers who know their stuff.
So the question is, in the current climate, who does Interest Only appeal to and what sort of consumers might you see looking for advice?
The first demographic we consider likely to benefit from today’s Interest Only mortgages are those in the Comfortable Communities segment, best described as “middle of the road Britain”.
Some of the consumers falling into this category will have taken out an Interest Only mortgage alongside an endowment or other repayment vehicle. Members of this demographic present an opportunity to brokers when they decide to move home or refinance. While some clients may be happy with their current property, others may want to use their equity to spend on home improvements, or to refinance when their term comes to an end. When a shortfall exists in the chosen repayment vehicle, Part & Part may offer a solution.
In contrast to Comfortable Communities, Affluent Achievers are likely to use Interest Only as part of a long-term financial strategy. Typically supported by a portfolio of savings and investments, Affluent Achievers are likely to be older and to have built up a large amount of equity in their home, with one in eight even owning a second property.4
As part of a demographic that includes some of the nation’s wealthiest people, Affluent Achievers are usually high income and high net worth borrowers who may be looking to use Interest Only products to effectively leverage their incomes and considerable property assets.
In contrast to Affluent Achievers, members of the Rising Prosperity demographic have not yet built up a large amount of equity in property, but they have a bright future ahead of them. Typically employed in managerial or professional occupations, this group is financially savvy and likely to benefit from high earning potential over the long term.
With their income likely to grow over the coming years, Interest Only products could provide members of the Rising Prosperity demographic with the flexibility needed to support their wider financial aims. For them, Interest Only could be a credible way for them to use their future earning potential to their advantage.
Do you have further questions about Interest Only? Our Interest Only expert Mark Collar will be answering questions over Twitter in our Q&A. Terms and Conditions apply. Tweet us now @LBSIntermediary using #AskLBSIntermediary to get your questions answered by Mark. Questions which are personal or specific to a particular customer, mortgage account or type of mortgage product will not be answered as part of the Twitter chat session.
For more information about Interest Only, or to speak to one of our team about general enquiries or specific cases call 03450 50 5555. We may monitor and/or record your telephone conversations with the Society to ensure consistent service levels (including colleague training).
2 Taken from CACI Data https://www.caci.co.uk/