Niche work if you can get it
Brokers say Santander’s decision to cap all interest-only lending at 50 per cent loan to value could be the trigger that sees the product return to a niche status.
The lender, which has historically had a relatively lenient interest-only criteria compared with other main high-street lenders, said last week it is capping interest-only lending at 50 per cent for borrowers wanting to place any part of their mortgage on interest-only.
Existing customers, however, will not be affected and will be able to port their mortgage as long as the product is a like-for-like equivalent and where they are seeking to borrow the same amount or less under the old 75 per cent LTV cap.
The move has shocked brokers. Chadney Bulgin mortgage partner Jonathan Clark says: “Santander has gone from being the most lenient lender to the strictest when it comes to interest-only. The 50 per cent LTV cap has caught us all by surprise. It is not good at all.
“I can understand Santander not wanting people to take out interest-only mortgages in branch but when there is a fully advised process, it can be a very good product.”
Prolific Mortgage Finance managing director Lea Karasavvas says Santander’s move will have a significant effect on brokers, particularly those in London and the South-east. He says: “A lot of London-based brokers will have clients who rely heavily on bonuses and use these payments when budgeting for a mortgage. This will make it harder for those people to get a mortgage and will mean less business for brokers.”
Interest-only mortgages have been a hot topic in the mortgage market since the FSA published its mortgage market review paper last July.
The regulator said it wanted lenders to check that borrowers have an acceptable repayment vehicle in place.
This led lenders such as Lloyds Banking Group, Woolwich, Northern Rock and Coventry Building Society to tighten their criteria in anticipation of a final set of rules on interest-only mortgages.
In the final MMR consultation paper, published in December, the regulator proposed lenders should assess affordability on a capital and interest basis unless the borrower has a “clearly understood and believable” way to repay the mortgage.
Some brokers believe this could lead other high-street lenders to follow Santander and reduce their maximum LTV on interest-only mortgages.
Lentune Mortgage Consultancy director Stuart Gregory says: “I think quite a few other lenders will follow suit and we will be in the same situation as when interest-only was first mentioned as part of the MMR - there will be a few knee-jerk reactions in the next few weeks.”
Both Barclays and Lloyds Banking Group say they have no immediate plans to follow in Santander’s footsteps but they will continue to review market conditions.
Given that Santander’s new criteria go beyond the FSA’s revised MMR proposals, it can be argued that the company does not have an appetite for this sort of lending.
John Charcol senior technical manager Ray Boulger says Santander will undoubtedly lose business as a result of the move, especially if other lenders do not follow suit.
He says: “One of the reasons Santander has been attracting business is that its criteria has been more helpful on interest-only.
Santander will, without question, lose business as a result of this move. The only way it can make this up is to have more competitive rates but it does not seem to be a very sensible business plan to change an interest-only policy that was clearly working and reduce rates to maintain lending levels.”
London & Country associate director of communications David Hollingworth believes the industry will inevitably shift towards repayment mortgages as the default choice for home finance.
This can already be seen in FSA figures which show interest-only mortgage sales have declined from a peak of a third of all mortgage sales in 2007 to around 20 per cent today.
The FSA’s proposals for lenders to ensure a borrower’s repayment vehicle will repay the capital at the end of the term will cost the industry £14.7m to implement, with ongoing costs of £4.8m-£14.3m a year.
Precise Mortgages managing director Alan Cleary says this will result in interest-only mortgages becoming more expensive and the preserve of niche lenders only. He says: “Santander’s move is totally understandable, given the extra work the MMR will place on lenders doing interest-only.
“Interest-only will become a niche product, done by niche lenders, which will charge a premium to cover the additional costs of the checks you will have to put in place to ensure a customer’s repayment strategy is valid. That premium could be up to 1 per cent extra.”
Coreco director Andrew Montlake also believes interest-only mortgages could become a niche product again. He says: “I do not see why a borrower should struggle to get an interest-only mortgage if they can demonstrate they can afford it. In this instance, a limit of 75 per cent LTV is probably about right.”