The latest statistics from the Council of Mortgage Lenders show a dramatic increase in the number of borrowers who have taken out interest-only mortgages without having repayment vehicle.
The CML’s methods of repayment figures show that 24 per cent of homemovers and 17 per cent of first-time buyers have interest-only loans with no repayment vehicles specified, up from 20 per cent and 15 per cent in 2005 respectively.
IFAs believe it is vital that people consider how they will repay their mortgage rather than leave as something to tackle in the future.
The biggest proportion of borrowers with no repayment vehicle are second or third-time buyers upsizing to accommodate a growing family or handle other lifestyle changes.
London & Country mortgage specialist David Holl-ingworth says: “A lot are second or third-time buyers stepping up the ladder are moving from a flat to a house and it can be a big jump to make.”
People in this situation are often hit with a double-whammy, according to Rooftop Mortgages business development director Alison Beech. She says: “A lot of people are upgrad-ing because they need the extra space if they are having a baby or changing jobs. The chances are that their disposable income is diminishing as well while their mortgage payments are going up so it can be difficult.”
It seems that young professionals with income growth potential are also taking out interest-only mortgages without specifying a method of repayment. For many borrowers, taking out an interest-only mortgage is a conscious lifestyle decision and most are aware of the potential problems.
Mortgages plc head of marketing Julian Wells has a relaxed view about his own interest-only loan and claims many others in their late 20s and early 30s feel the same way.
He says: “I took out an interest-only mortgage only because it had a lower monthly repayment. My expectation is that in three to five years I will swap to capital repayment when I am earning more money and have built up some equity in the property.”
That is the general idea for many first-time buyers. Many FTBs who take out an interest-only loan without a repayment vehicle plan to start repaying the capital after about two years, once they have found their feet, says Purely Mortgages chief executive Mark Chilton.
He adds that as long as the buyer follows through, this is not a bad plan of attack.
First-time buyer and Money Marketing reporter Nicola York, 25, chose an interest-only mortgage when buying a two-bedroom flat last May. She says that on her current salary she would be too stretched to start repaying the capital.
But she says: “When my fixed rate ends, in a bit over a year, and I get a decent pay rise, I will start repaying the capital on the property but it will add another £200 a month to my repayments.”
Formula Limited director Mark Osland says many FTBs take out interest-only loans on a temporary basis but get used to having the extra cash so push back switching to capital repayments. He adds that, for FTBs, the burden of paying back the debt seems a long way off.
But the number of FTBs choosing to defer capital repayments on their homes rose by only 2 per cent in the past year to 17 per cent, which is still reasonably low.
Osland says FTBs are more cautious when taking out a mortgage while second-time buyers and buy-to-let investors are more confident and tend to be convinced that house prices will continue to rise.
Wells says: “I am surprised that more first-time buyers are not looking for the lowest monthly repayment because they have saved up all their money for the deposit. But perhaps this is indicative that the biggest problem is raising money for the deposit, not necessarily the monthly repayments.”
Chilton believes that many older, more sophisticated borrowers are taking out interest-only loans, hoping that a combination of inheritance, property inflation and the ability to downsize later on will see them OK. But he points out that this, like in most plans, depends on house prices continuing to rise.
Buy-to-let mortgages are also largely interest-only. Beech says: “Interest-only loans are popular with buy-to-let investors because it allows them to minimise outgoings and maximise profits when they sell the property.”
Industry figures believe that interest-only borrowers without a specified repayment vehicle are generally well-informed individuals making a conscious choice.
Chilton says: “I do not have the feeling that there is a bad advice bombshell or a misselling bombshell. These people are all pretty informed.”
It is a lifestyle decision rather than a problem of the quality of advice, according to Wells.
Hollingworth claims that while borrowers need to be aware, the lender is responsible for ensuring their client understands the potential risks.
He says: “Lenders are generally looking to pose questions on how a loan is going to be repaid but what more can they do? Hopefully, most people understand what they are getting into.”
But Osland believes that lenders should take more responsibility for the amount borrowed. He says: “I think that lenders make it much too easy. Their duty of care should be that they consider how the borrower will repay their loan but lenders do not ask very strongly. I think lenders make more money when borrowers have a bigger debt for longer than from repayments.”