"These penalty-free overpayments reduce the capital and can therefore have the same effect as taking out a repayment mortgage, but with more flexibility and control over when payments are made."
While we’re all hoping for more stability in the economic and housing markets in the months to come, affordability remains the biggest challenge for homebuyers and those coming to the end of fixed-term deals.
We’re still seeing an increase in applications for impaired credit, while debt consolidation is the most common reason for remortgage capital raising.
It shows that while activity may be starting to settle in the markets, many homeowners are still struggling to adapt to the higher cost of living, particularly when coming off historically low fixed deals.
As a Society we’ve done a lot of work on our product range, with the aim of making mortgages more accessible for more clients. This has focused on adjusting criteria, reducing product fees or launching new features where we can for those who feel excluded from homeownership, or at risk of losing a home.
For advisers, this has meant refocusing conversations with customers to consider a wider range of options than they may have previously discussed.
One area where we are seeing an increase in enquiries from networks and clubs currently, is our interest-only or part-and-part mortgage options.
This is a popular service offering because we don’t require minimum incomes and we stress the loan on an interest-only basis, not a repayment basis.
The flexibility of an interest-only mortgage
There are many reasons why someone might choose the interest-only or part-and-part route.
Interest-only mortgages are generally the product of choice among landlords already, but in the residential world homeowners often prefer the thought of repaying their debt from the get-go.
Yet what’s often forgotten is the fact you can choose to make some additional payments with most interest-only mortgages during the early repayment charge (ERC) period.
For example, lump sum overpayments up to 10% can generally be made per year during the initial applicable ERC period.
These penalty-free overpayments reduce the capital and can therefore have the same effect as taking out a repayment mortgage, but with more flexibility and control over when payments are made. This could be a better solution for people with inconsistent income streams or annual bonus structures, for example.
With a part-and-part mortgage, you’re already bringing down the loan amount, albeit at a slower but more manageable rate.
Interest-only could also be a preferred strategy where customers are expecting an injection of cash in the future, such as equity from another property, a private pension lump sum, or some other form of return on investment.
The key is making sure people are aware of all the pros and cons of an interest-only solution, including the repayment strategies that will be accepted, and have a plan for paying the mortgage off when the term ends, or when their circumstances change.
Ultimately, the need for advice has never been greater. While lenders are introducing a wider variety of products, it’s the role of advisers to understand what’s available and be able to communicate the finer details of the different options. People’s changing financial circumstances and increased living pressures means looking at a broader range of solutions to find the mortgage that best suits their needs.
