Interest-only the new dodo
With Lloyds Banking Group’s clampdown last week and Santander’s LTV restrictions the week before, interest-only is definitely on the endangered list.
For 10 years, interest-only has been used to help borrowers meet high house prices and then take advantage of their property’s growing value. The Council of Mortgage Lenders’ monthly data on how borrowers repay their mortgages shows why the regulator might now see interest-only as a problem.
In January 2002, 87,300 purchase mortgages were taken out, of which 12,900 - 15% - were interest-only. In terms of repayment vehicles, 6,200 didn’t have one specified and 6,700 did. In January 2007, 75,500 purchase deals were taken out, but out of this 24,100 were interest-only - a massive 32% of the overall market.
In terms of the split between interest-only deals without a repayment vehicle and those with one, 17,600 didn’t have one specified and only 6,500 did.
Not surprisingly, at the CML’s last count for December 2011, along with the rest of the market there were dramatically fewer interest-only loans taken out. In a month when 47,400 purchase mortgages were taken out, there were only 4,600 interest-only loans - fractionally under 10%. Just 900 had a repayment vehicle specified compared with 3,700 that didn’t.
With interest-only now only available up to 80% LTV from a few niche lenders, it seems safe to say that the proportion of interest-only deals will fall further. Lenders are understandably concerned about a claims culture that could lead to them taking a big hit from interest-only. But without it, many first-time buyers will struggle to buy and that first rung of the ladder will remain out of reach for a long time to come.