Fiona Sharp, IFA view
As a young woman, I was keen to prove my independence by buying a Victorian converted flat in Doncaster. I was not financially savvy then and knew little about the mortgage market. I turned to a high-street building society for advice and was promptly sold a 100 per cent interest-only mortgage with an endowment.I recall the adviser explaining the cost difference between repayment and interest-only mortgages and deciding that the former was unaffordable despite an imminent promotion. She told me that my deposit should be used instead for furniture and costs. The endowment was sold to me because I was in the RAF and stood more chance of dying early, so needed the life cover. Charming. No mention of the mortgage indemnity premium or other costs involved but I did not care because I was going to own a flat. The mortgage completed, I lay smug in my avocado bath feeling I had finally made it. There followed one calamity after another. The main pits closed and my flat’s value plummeted. Because of the Mip charge and 100 per cent interest-only mortgage, I owed more on the mortgage than the flat was worth. It was a negative-equity millstone for seven long years. Fast forward 16 years. A client looking to buy a flat in London needed advice last year. Her salary was quite low and she wanted a 100 per cent interest-only mortgage with no repayment vehicle. I explained the risks involved, that her options were limited and that some lenders still charge a Mip. We considered the different angles including using her father as a guarantor but he earned less than she did and carried debt himself. We scrutinised her income and expenditure, and I came to the conclusion that she should wait and have more capital behind her before embarking on a big purchase. But she, like me, was too keen. Her mother berated me for not helping her daughter. I explained that I was trying to protect her from future difficulties but to no avail. She went to her bank, got her 100 per cent mortgage and had to sell up last month because she cannot afford the repayments. More should be done to assist first-time buyers. Lack of affordable housing, coupled with the fact that graduates are leaving university with significant debt, makes borrowing more difficult. Morgan Stanley’s recent offering, the Flexishare mortgage via Advantage, goes some way to bridge the gap, offering a standard mortgage of up to 80 per cent of the property price and a residential ownership loan of up to 35 per cent of the value at a lower interest rate. Buyers do still need to have a deposit of 5 per cent but the residential ownership loan does potentially help those with low income multiples if affordability is proven. The Kent Reliance perpetual interest-only mortgage which can be handed down through generations is also a novel concept. This combines capital growth prospects with an element of inheritance tax planning. All very well if the kids can afford the ongoing mortgage, which in theory could never be paid off. However, there is still this underlying issue that UK property must be attained at all costs and an assumption that bricks and mortar are a one-way ticket to financial security. Over the long term we have experienced an almost unprecedented gain in property values coupled with a sustained low interest environment but doesn’t anyone remember the repossessions of the early 1990s? A house price collapse is unlikely in the current economic climate but bankruptcies are on the rise. The wafer-thin margin for error in terms of gain or loss in some circumstances worries me sufficiently to mainly counsel against the risk of 100 per cent interest-only mortgages. There will be those who disagree but I have to be true to myself. I only have to think of Doncaster for that.
Fiona Sharp is a senior adviser at M2Finance4Women