Interest-only mortgages are starting to make a comeback, almost 15 years after they were classified as a dangerous financial product. These loans were once a prominent feature of America’s mortgage market. Following the 2007-08 financial crisis, their popularity dropped overnight when regulators deemed them “high-risk ticking time bombs.” Recent developments indicate that lenders are revisiting this mortgage option, with companies like Gen H launching new offerings aimed at revitalizing interest-only mortgages.
Prior to the financial crisis, interest-only mortgages represented a shocking 39% of regulated mortgage sales in 2007. By 2024, they made up just 4.5% of these sales. This dramatic drop was due to the financial crisis that illuminated the systemic dangers present in this lending practice. Too many borrowers were sold on these loans with little documentation supporting their ability to handle the added debt. This concern alone should call into question the long-term viability of such products.
Gen H’s announcement earlier this month of a staged launch for new interest-only mortgages is just one sign that the market may be changing accordingly. On its website, the company claims that these mortgages can offer key access to home ownership to those that want it most. As one representative from Gen H stated, interest-only loans “can spell the difference between staying locked in the rental cycle or accessing home ownership and building meaningful wealth over time.”
The Financial Conduct Authority (FCA) is in the process of rolling back regulations on interest-only mortgages, which may soon allow them to return. The FCA appreciates that these products serve as flexible tools. They are a useful product for consumers who are anxious to get into the housing market. To improve borrower experience, the authority recommended looking into situations in which borrowers could more readily move between repayment scenarios over the life of the mortgage.
Experts in the field strongly contest that interest-only mortgages have lost their luster and usefulness. Buy-to-let landlords, for example, stand to benefit from cheaper monthly repayments. The FCA indicated that these loans could “substantially reduce the contractual monthly payment and potentially make the mortgage more affordable.” The affordability provision is especially important for renters who hope to transition into the homeownership market. Unfortunately, this urgency only increases as other dangerous mortgage products like 100% mortgages begin to resurface.
Despite the potential benefits, caution remains paramount. In the wake of the financial crisis, interest-only mortgages were thoroughly demonized as perhaps THE poster child of dangerous lending practices. Regulatory circles are still haunted by the ghosts of past widespread defaults. This fading memory continues to stoke conversations about the best ways to mitigate risks when reintroducing these products.