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Interest-only the new dodo

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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.

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Readers' comments (4)

  • 'But without [interest only], 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.

    Wrong! Without interest-only property prices will come down to a level that buyers can afford with proper mortgages (i.e. those with a greater than 50:50 chance of being paid off during the debtor's lifetime....

    First time buyers don't want or need irresponsible lending practices. They just need lower house prices. And with the excellent work being done by the FSA it won't be long now......

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  • It would a simple matter to set ALL mortgages at a sensible multiple of average earnings, say 3x individual salary and 3.5x joint salary for couples, removing BTL mortgage interest relief and interest-only mortgages in the process, the latter a process now thankfully and finally underway. Once the large majority of people could no longer borrow £200k to buy an overpriced house, the prices of the majority of homes would fall in-line with these mortgage limits. Key to this is to make borrowing money reflect the cost of the sum borrowed by removing the teaser mortgage rates that rely on non-depreciation of the asset to remortgage and setting the rate for the 25 year life of the mortgage.

    Do these two things, and the average person in Britain can once again afford the average house, boom and bust would be banished, the moral hazard of making the whole collectively pay for the mistakes (and profits) of the few would fall away, and the economy would never again be brought to its knees because of speculative activity surrounding one of life's essentials: an affordable roof over one's head

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  • What the first two correspondents have failed to consider, is that these moves will create a 2nd major group of "mortgage prisoners". We a one set from the sub prime era who are sat with numerous holding companies of now defunct sub prime lenders on libor + loading rates. Now we will have another which will be forced to remain with their existing lenders on an SVR mortgage forever and a day, because their current lender won't offer them a new product without putting them on repayment which is likely to be totally unaffordable. And they cannot remortgage to another lender because nobody wants to lend interest only with no repayment vehicle. In fact it is laughable that lenders still consider endowment as a plausible strategy for repaying a mortgage as everyone I have come across in the last 4 years is well below target.
    Surely, if a property has at least 20% equity in the current market sale of property is as much a valid tool as endowment or any investment backed plan.
    I have a client with a portfolio of 4 properties including his main residence, with his retirement plan to sell 3 of the 4 and retain one as his retirement residence and he will be mortgage free whenever he does this.
    There appears to be no imagination left in repayment strategies. The FSA's MMR has struck fear into lender's hearts, and the compensation culture being fuelled by the poor economic climate is leading to heavy-handed, no thought for existing borrowers knee jerk reactions.
    Somebody with a cool rational head needs to take stock

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  • Becoming a mortgage prisoner is a risk that everyone takes when they buy a property at a large LTV. Of course, it's not a problem because they are either:

    a) On a repayment mortgage
    b) On an interest only mortgage that they will be repaying in the future

    So they bought an asset that they will eventually own outright and worst case it has depreciated in value. Welcome to Capitalism.

    What's that? They don't have a repayment vehicle? They were going to sell the house and live off the equity they built up? Oh dear, I have a jar of magic beans for sale if they are interested?

    Home ownership is not a right. If our Socialist Government's stopped handing out free accomodation to the rest of the world the rents would be affordable and the "average person" could happily rent for their entire life and not have to worry about complex financial instruments.

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