What if we go interest-only?

Clients that are about to come out of a fixed-rate mortgage are being met with rates over double what they have enjoyed previously. To many, this is a shock of epic proportions, compounded by the aforementioned other aspects of the cost of living crisis. It's no wonder people are looking to make savings.

The one thing we need to make fundamentally clear to clients is that, whilst interest-only may well bring down your mortgage payments, it is most definitely not making you a saving in the long run. It's simply an adjustment on your financial planning — which could still hurt if not addressed correctly. If advice over interest-only is not covered diligently, clients could find a fifth of their mortgage term has passed, with their debt remaining the same and higher payments required in a shorter time.

Many borrowers are considering a move to five year fixed rates, locking in and battening down the hatches, attempting to see out the storm "until things blow over." Does that necessarily require sacrifice? Do we need to scrap holiday plans, give up on daily coffees, making savings wherever possible to ensure the mortgage commitments are met? Or can we continue in the same habits enabled by the ridiculously low interest rates of the past ten years?

Interest-only is a valuable tool to those that use it effectively, offering flexibility of how the capital element of a mortgage is repaid. However, the essence of interest-only means the debt remains at the end of a repayment term if a suitable plan is not adhered to — this is not a get out of jail free card to allow us enjoying the luxuries afforded since those low base rates of 2016.

Most who opt for interest-only do tend to use "sale of property," utilising the equity that has built to buy a smaller home for cash at maturity. This can prove risky in itself, if property value does not rise as much as anticipated. Others use investments such as endowments/ISAs, share portfolios, vested shares, and in some cases even pension lump sums. HSBC allow advice bullet repayments as a repayment tool. The one constant throughout all these methods is that each has repayment structures in place. One repayment method you will not find listed with lenders is to sweep it under the carpet and worry about it later.

Whilst many borrowers have opted to repay through sale and downsizing, how many will actually commit to this process when it arrives? How many will instead turn around and suggest they were falsely advised by their broker on what was required, finding themselves left up a certain creek without a paddle? This is the situation many will find themselves in, having pursued interest-only and found themselves 10-15 years from maturity, with no choice but to sell up to pay off debt.

I have always believed the role of the mortgage broker to be proactive for clients, rather than reactive. Now more than ever, our advice is needed and rather than default to interest-only to keep costs down, we need to ensure we are outlining exactly what that means, and how payment plans should be adjusted to ensure our clients stay on track. We also need to highlight that when inflation is high, costs are spiralling, there is no quick fix and that regrettably, sacrifices may have to be made.