Lloyds Banking Group’s recent decision to stop offering interest-only mortgages above £500,000 and to reduce the number of acceptable repayment vehicles for such mortgages below £500,000 has taken many by surprise. Earlier in the year, Santander amended its criteria for mortgages above 75 per cent loan to value and now insists on a capital and interest repayment mortgage, unless a specific repayment vehicle is in place. Many others have re-introduced stricter criteria around such mortgages. However, I see this as a tremendous opportunity for intermediaries.
Historically, interest-only mortgages had to be supported by a specific repayment vehicle. Details of that vehicle – an endowment, a tax-exempt special savings account, a personal equity plan, an Isa or a personal pension plan – were provided to the lender and projected values needed to equal any mortgage being applied for.
Where possible, the lender assigned the contract to provide them with greater control and up-to-date knowledge of any missed premiums. Specialist departments existed to ensure the interests of lenders were protected. Of course, this cost time and money and, during the late-1990s, the majority of lenders relaxed their criteria and stopped taking assignment of contracts and ultimately stopped asking prospective borrowers how they intended to repay the loan.
They went one step further and stopped taking assignment of life cover to protect the borrower and lender in the event of a borrower’s death, relying instead on a paragraph in the offer strongly recommending suitable cover be taken. They were happy to rely on repayment vehicles such as prospective bonuses, inheritance, sale of property and sale of business.
On reflection, the move by Lloyds and others should come as no surprise. We are now paying the price for the excesses of the last decade.
As lending margins continue in favour of the lender, they are investing in the re-introduction of checks and balances abolished when margins were skinny and the game was all about volume. It is not unreasonable to ask and document how someone intends to repay their borrowing.
Both lenders and advisers have a responsibility to their client to ensure they have the ability to repay any interest-only mortgage. And for those that do not, there is a readymade alternative – a capital and interest repayment mortgage.
However, there are many clients for whom an interest-only mortgage remains appropriate. Those with strong track records of bonuses, maturing share options, investment portfolios – the list is endless. The fact that one of the UK’s largest lending groups no longer offers this facility creates the opportunity I mentioned earlier. As one door closes, another opens and the need for professional, independent advice has never been greater.
Mark Harris is managing director of Savills Private Finance