Interest-only mortgages: a godsend for UK borrowers (if you can get one)

theguardian.com:

If you are one of those households staring down the prospect of unaffordable monthly mortgage repayments, one option is to go interest-only.

Massive before the 2008 financial crisis, interest-only mortgages in which the borrower only repays the interest on the loan can almost halve a household’s mortgage repayments.

In the run-up to the financial crisis borrowers were signing up for huge interest-only mortgages with no prospect of ever being able to repay the amount borrowed. The new affordability tests introduced post-crash all but did for them.

Despite that, they have returned to product lineups in recent years. The problem for many will be the fact that lenders are now very choosy about who they give them to, says David Hollingworth, an associate director at the broker firm L&C Mortgages.

In pure repayment terms, they can be a godsend – if you can fulfil the criteria. A £200,000 repayment mortgage (over a 20-year term) at 5.5% will cost about £1,376 a month. If you were able to switch to an interest-only deal, the monthly payments come down to a much more manageable £917. Someone with a 15-year £400,000 mortgage will see their payments almost halve from £3,268 a month on a repayment deal to £1,833.

“Going interest-only can work but only for the right kind of borrower, someone with a good financial history of repayments, someone with plenty of equity in their home who is just looking for some breathing space,” Hollingworth says.

One of the main aspects of interest-only is that borrowers are not repaying the debt. Those taking out a £200,000 five-year interest-only mortgage still owe £200,000 at the end of the five-year term. This might not be a problem at 30but it can be for older people.

“Lenders want to see evidence of a