They were once called a “ticking timebomb” but interest-only mortgages could become easier to get hold of as the Financial Conduct Authority (FCA) looks at ways to support home ownership.
Interest-only mortgages were hugely popular but almost became extinct following the 2007-08 financial crisis, with some viewing them as one of the worst examples of irresponsible lending.
But in a discussion paper on the future of the mortgage market, the FCA said it would like to hear views on “whether our rules could better support more interest‑only mortgages”.
It added: “Interest‑only mortgages could be suitable for consumers who may struggle to afford a repayment mortgage and can support sustainable home ownership.”
Its seemingly supportive words may suggest that, like 100% mortgages, which also largely disappeared after the financial crisis and are starting to pop up again, these contentious deals could be heading for a comeback.
With a fully interest‑only mortgage, the borrower only pays the interest on their home loan, “substantially reducing the contractual monthly payment and potentially making the mortgage more affordable”, said the regulator. There are also so-called “part and part” mortgages where a chunk of the loan is interest-only and the rest is on a repayment basis.
One big problem with pre-financial crisis interest-only loans was that many were taken out without proof borrowers could pay off their debt. In 2009 the FCA’s predecessor regulator officially labelled them as “high-risk” and, in 2012, it called them a “ticking timebomb”.
The FCA now expects lenders to ensure there is a “credible repayment strategy” for paying back the capital at the end of the mortgage term.
Interest-only home loans are available – they made up 4.5% of regulated mortgage sales in 2024, compared with 39% in 2007 – though they are mainly used by buy-to-let landlords. They are also available as a niche product aimed at people in certain generally higher-earning professions such as barristers, accountants, investment bankers and vets.
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Despite their tainted image, many experts have maintained that these loans remain right for certain people and, only this week, a lender called Gen H announced the staged launch of a new interest-only offering. It said this type of deal “can spell the difference between staying locked in the rental cycle or accessing home ownership and building meaningful wealth over time”.
In its discussion paper, the FCA said: “Interest‑only mortgages can be a flexible way for consumers to engage with the property market … We could, for example, explore circumstances in which borrowers could more easily shift between repayment and interest‑only during the mortgage term without having to set up a repayment vehicle.”