Are interest-only mortgages too risky for first-time buyers?
Interest-only mortgages are to become an option for most first-time buyers for the first time since the financial crisis.
From Monday Gen H, which specialises in loans for first-time buyers, is offering interest-only deals for those with at least a 20 per cent deposit and a minimum income of £50,000.
Buyers will need to demonstrate how they will repay the loan, for example by showing that they can save the difference between the monthly costs of a repayment mortgage and their interest-only payments. Gen H will also lend to first-time buyers with as little as 5 per cent deposit on a part interest-only, part repayment basis.
Many lenders have started making it easier for first-time buyers to borrow, with some lending up to seven times salary, instead of the standard limit of 4.5 times. But, in an uncertain market, with house prices stagnant in many areas, could this all be too risky?
A shove up the ladder
Research by the Building Societies Association (BSA), a trade body, suggests that there are 2.2 million 'missing' first-time buyers who should have bought since the financial crisis but have been unable to, either because they have struggled to save a deposit or can't borrow enough.
To fill this gap, the government, as part of its drive for economic growth and increased homeownership, has prompted the Financial Conduct Authority (FCA), the City regulator, to lean on banks and relax the lending rules. In the past three months, almost all high street banks have reduced the interest rate at which they 'stress test' borrowers, to see if they could afford payments if rates went up dramatically.
Borrowers can now also find more loans at 100 per cent loan-to-value (LTV), where you borrow what the property is worth, without a deposit — another fixture of the pre-2008 mortgage market.Skipton Building Society offers five-year mortgage deals to those with less than a 5 per cent deposit who can prove they have been paying rent at the same level as mortgage repayments for two years. April Mortgages, which began lending in the UK last year, has a no-deposit deal for those with a household income of at least £24,000 who are happy to fix for ten or 15 years.
And the ratio of debt to income is being relaxed, with April Mortgages lending up to seven times a borrower's income on its ten or 15-year fixed-rate deals, provided they have at least a 15 per cent deposit. Skipton will lend 5.5 times a buyer's salary if they have an income of £50,000 — up from . £100,000.
The downside
While lenders have been praised for finding innovative ways to get more people onto the property ladder, concerns have been raised that making it easier to borrow will simply push house prices up, leaving first-time buyers having to find bigger deposits and take on even greater debt.
The estate agency Savills estimated that a 1.25 percentage point reduction in stress rates by high street lenders could increase first-time buyer sales 24 per cent over the next five years, but could also push up prices between 5 and 7.5 per cent.
That could be a problem when buyers are already stretching themselves. Some 7 per cent of new mortgages were at 90-95 per cent LTV in the first three months of the year, their highest share since 2008, according to the FCA.
And while mortgage rates have fallen over the past year, first-time buyers are spending a bigger chunk of their cash on repayments. In March they spent an average of 22.6 per cent of income on their mortgage, the highest proportion since November 2008, according to UK Finance, a banking industry body.
'I'm nervous,' said Neal Hudson from the property data firm Residential Analysts. 'There are good reasons for a bit more flexibility but I fear that lenders and the government are going too far. Now that rates are falling, that saving is being used to push up house prices rather than reducing repayments. That's not good.'
Paul Broadhead from the BSA said the return of part repayment and part interest-only loans could be popular because they 'provide a lower deposit threshold but also help affordability, which we know are the two important barriers for first-time buyers'.
Critics, however, believe that interest-only loans should remain limited to those with more equity and assets. Martin Stewart from the mortgage broker London Money said: 'Let's not forget that interest-only was one of the significant contributors to the crash in 2008, along with pushes for higher loan-to-value lending and excessive income multiples. Throwing all these things together to limp the housing market forward feels like a dangerous game.'
How the interest-only deal works
The Gen H interest-only mortgage rates will start at 5.09 per cent for a two-year fix at up to a 60 per cent LTV, with a £1,499 fee, and 5.33 per cent for a five-year fix with the same maximum LTV and fee. For comparison, the best two-year fix for a standard repayment mortgage at 60 per cent LTV is 3.95 per cent and 3.99 per cent for a five-year deal.
For those with only the minimum 20 per cent deposit (80 per cent LTV) the two-year fixed rate is 5.44 per cent. For a five-year fix it is 5.38 per cent.
In time, Gen H plans to make interest-only deals available to those whose parents can support them by using their investments, buy-to-let property or pension pot as the initial repayment strategy for the loan, which could change if their child was later able switch to a repayment deal.
Peter Dockar from Gen H said: 'Interest-only mortgages have long been pigeon-holed as a tool for the rich. But we believe they could fill important gaps for first-time buyers and households on average incomes too. In this landscape, buyers need all the help they can get. We all need to consider how familiar tools might be used in new ways to benefit more people.'
Why interest-only became rare
Interest-only mortgages were common before the financial crisis, when buyers could get larger loans with few questions about how they planned to repay them. At their peak in 2007 some 51 per cent of new mortgages were either fully or partially interest-only, according to the FCA.
House prices fell about 20 per cent between 2007 and 2009 during the financial crisis. This led to mortgage rules being tightened in 2014, making it harder to get interest-only deals and forcing lenders to be much stricter about repayment methods. At the end of last year the total number of home loans on an interest-only basis was 541,000, down from 963,000 in 2012, according to the trade association UK Finance. Only 8.7 per cent of new mortgages in the first three months of 2025 were fully or partially interest-only.
Interest-only loans have tended to be limited to wealthier borrowers with more equity. Applicants normally need to earn at least £75,000 a year (or a total of £100,000 on a joint application) and have a 25 per cent deposit and proof of how they will repay the loan. They can only use the sale of their main home as a repayment strategy if there will be enough equity afterwards to buy somewhere else.
This has made them largely inaccessible for first-time buyers — lenders including Nationwide Building Society will not give them interest-only mortgages at all.
Gen H said buyers would be able to list downsizing as a repayment strategy provided that the interest-only portion of their loan was capped at 60 per cent LTV, and that they would have at least £200,000 in equity (£300,000 in London) after repaying the interest-only mortgage. This would be based on their initial deposit and the capital repayment portion of their loan, and would not assume a future rise in house prices.
Other options available
Paul Barnes, 40, and James Hope, 36, expected to be saving for another five years to buy their first home in Cambridge — until they found out about an unusual scheme from Cambridge Building Society.
Rent to Home offered buyers the chance to enter a ballot, where they could rent a property from the building society for up to three years, after which they could get back 70 per cent of what they had paid in rent to use as a house deposit, as long as they took out their mortgage with the building society.
The couple won their chance in 2023: 'We were actually hesitant when we got the call because we thought there must be a catch,' said Barnes, who works for an exam board. 'Cambridge is its own little bubble and it is quite an expensive and competitive market.'
They moved into a four-bedroom townhouse in Longstanton, near Cambridge, paying rent of £1,450 a month. It means that after three years they could get about £36,500 back as a deposit. The couple are now two years in and hope that they will own their home by next summer.
'I can't believe schemes like this aren't widely available. It's a massive opportunity for people like us, who might otherwise be struggling to get a foot on the housing ladder due to the cost of living and fierce rental market,' said Hope, who works for the Cancer Research UK Cambridge Institute.
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