Interest-Only Mortgages for First-Time Buyers: A Risky Ladder or a Golden Opportunity?

A new offering from lender Gen H is shaking up the UK mortgage landscape, as it introduces interest-only mortgages specifically for first-time buyers with at least a 20% deposit. The move aims to make homeownership more accessible, particularly for those struggling to escape the persistent rental cycle. However, this innovative approach is already sparking debate among financial experts, with some hailing it as a vital affordability solution and others cautioning against potential pitfalls.

What is an Interest-Only Mortgage?

Unlike a traditional repayment mortgage where you chip away at both the loan amount and the interest each month, an interest-only mortgage, as its name suggests, only requires you to pay the interest. This significantly lowers monthly outgoings, making homeownership appear more affordable on paper. The catch? The original loan amount remains untouched and must be repaid in full at the end of the mortgage term.

Historically popular in the 1980s and 90s, often linked with endowment policies, interest-only mortgages saw their popularity wane after many of these investments failed to deliver promised returns, leaving borrowers in a precarious position. Post-financial crisis, stricter regulations were imposed, and today, they are predominantly used by buy-to-let landlords or affluent borrowers with robust repayment strategies. In fact, the total interest-only mortgage stock for homeowners fell by 17% in 2024 and has plummeted by 78% since 2012, according to UK Finance data.

Gen H's Bold Proposition

Gen H believes now is the time to reintroduce this option to a specific segment of first-time buyers. Pete Dockar, chief commercial officer at Gen H, states the product is designed for professionals and self-employed individuals with a minimum household income of £50,000 per year, who can demonstrate a solid repayment strategy for the loan.

Dockar highlights the potential for a "10-15% boost in affordability" over a 30-year term, arguing this could be the crucial difference between remaining a renter and stepping onto the property ladder. "Housing affordability challenges are here to stay," he commented, "and helping everyone access homeownership and build long-term wealth requires us to consider how familiar tools can be used in new ways." He views interest-only as a tool that can now support first-time buyers, rather than just the wealthy.

The Positive Side: A Gateway to Homeownership?

For many aspiring homeowners, the primary allure of an interest-only mortgage is the reduced monthly payment. This can dramatically lower the barrier to entry into the housing market, especially in areas with high property prices. The enhanced affordability means a more manageable budget, potentially allowing first-time buyers to purchase a home sooner than they otherwise could. This could be particularly appealing for those with significant but irregular income, such as self-employed individuals or those receiving large bonuses, who can plan to make lump-sum overpayments. The lower outgoings also free up capital that could be used for other investments, savings, or even home improvements. Borrowers can make voluntary overpayments up to 10% of the total mortgage amount each year without penalty, offering a path to reduce the capital over time if their financial situation allows. Ultimately, for some, this could be the only viable route to move from renting, where payments often equate to or exceed mortgage interest but build no equity, into owning their own home and building long-term wealth.

The Negative Side: A Risky Bet?

Despite the clear advantages in terms of initial affordability, mortgage experts are urging caution, highlighting the significant risks associated with interest-only mortgages, particularly for first-time buyers. The biggest concern is how borrowers will repay the entire loan amount at the end of the term. While Gen H accepts future property sale, other properties, pensions, investments, or endowments as repayment strategies (with proof of funds required), critics worry about the financial discipline needed to ensure these plans materialise.

Furthermore, Gen H's interest-only rates are notably higher than comparable repayment mortgages. For example, a £200,000 interest-only mortgage on Gen H's two-year fixed rate of 5.44% would cost £907 a month, while a repayment mortgage for the same amount over 35 years at a 4.14% rate (from another lender) would be slightly cheaper at £902 a month. This means borrowers could end up paying more interest over the long term without reducing the principal. Relying on the future sale of the property for repayment also carries inherent risks, as a downturn in the housing market could leave borrowers in negative equity, unable to sell for enough to clear the debt. Unlike repayment mortgages, you also don't build equity in your home through your monthly payments; your equity will solely depend on property value appreciation and any voluntary overpayments you make. Simon Bridgland, a broker at Charwin Private Clients, warns of a potential "future horror story," echoing past issues where borrowers were left without a viable repayment option, a scenario he fears could repeat if not managed with extreme caution. He stresses that "things that are totally out of the borrower's control will trash career plans and incomes intended for long-term repayment strategies."

Expert Opinions Divided

The re-emergence of interest-only mortgages for first-time buyers has drawn mixed reactions from the financial community.

Ross Lacey, director and independent financial adviser at Fairview Financial Management, believes interest-only mortgages "certainly has a place in the residential mortgage market." He notes that current repayment assessment processes are "much more stringent and realistic" compared to the past, suggesting a safer environment for these products.

However, Simon Bridgland of Charwin Private Clients expresses significant trepidation. While acknowledging the theoretical affordability, he advises users to approach it with "a little fear." He points to historical examples of homeowners nearing the end of their mortgage terms with no clear repayment path.

Making an Informed Decision

Gen H requires applicants to have at least a 20% deposit and a minimum household income of £50,000. For a £200,000 interest-only mortgage, a 20% deposit would mean a loan of £160,000. With a five-year fixed rate at 5.38% (and a £1,499 fee), monthly payments would be around £717.

The decision to opt for an interest-only mortgage as a first-time buyer is a significant one. While it presents a potential solution to the affordability crisis for some, it demands meticulous financial planning, unwavering discipline, and a robust, verifiable repayment strategy. Without these, the allure of lower monthly payments could lead to a far greater financial burden down the line.

What are your thoughts on interest-only mortgages for first-time buyers? Do you think the benefits outweigh the risks in today's housing market?