A year after interest only mortgages were criticised by the regulator two banks are plan a comeback.

The Clydesdale and Yorkshire banks have announced they will introduce interest only mortgages to branch customers.

The innovative products allow homebuyers to select interest only for the first three years of the mortgage halving the monthly cost.

Lower monthly costs

For someone with a mortgage of £250,000 the interest only cost would be £560 pm compared to a repayment mortgage of £1,146 pm.

For first time buyers and home movers on a tight budget the saving would be £7,032 per year but the regulator has warned interest only mortgages are a “ticking time bomb”.

The government’s Funding for Lending scheme has helped to reduce rates since it was launched a year ago.

A two year fixed rate can be as low as 1.5% and the Leeds building Society has launched a 0% mortgage rate for the first six months.

For remortgage buyers currently on their lenders standard variable rate, switching to a new mortgage deal would help them to reduce the cost of monthly repayments.

The equity release mortgage buyer can secure fixed rates typically from 5.9% upwards without any evidence of earnings, important for borrowers with only pension income.

Interest only mortgage concerns

Financial Conduct Authority (FCA) is the industry regulator and has indicated that about 1.3 million homeowners with interest only mortgages may have shortfalls of £71,000 on their mortgages.

In 2009 the then Financial Services Authority said interest only mortgages were “high risk” and a “ticking time bomb”.

Older remortgage buyers are often forced by the lender to repay their loan at a certain age and rather than downsizing, the equity release buyer can agree a lifetime mortgage.

Tighter rules and further changes to affordability checks to start from 2014 mean lenders have been abandoning interest only in faviour of repayment mortgages.

The FCA has said that interest only mortgages are suitable for some homebuyers and has been concerned that so many lenders left this market.

What are your next steps?

Talk to our London City Mortgage brokers for advice if you remortgage your existing home and want the best mortgage deal or release capital, buying your first home, moving home or are a buy-to-let investor.

Start with a free mortgage quote or call us and we can take your details. Learn more by using the equity release calculator, mortgage cost calculator, and property value tracker chart.

For older homeowners releasing equity from your property, our LCM mortgage advisers can recommend the lifetime mortgage, accessing wealth to repay an interest only mortgage, maintain your lifestyle or even pay for care at home.

Use your dashboard to access online mortgage quotes, money off vouchers and start your mortgage application online 24/7 on desktop, tablet or smartphone.