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Losing interest

Brokers are pessimistic about the prospect of the interest-only market opening up, despite recent movements in loan-to-value criteria.

Earlier this month Skipton Building Society lifted its LTV limit for interest-only mortgages from 60 per cent to 70 per cent – against the wider market trend of tightening interest-only criteria.

Skipton head of products Kris Brewster says the society is “committed to supporting high-quality borrowers with robust payment vehicles in place.”

He says: “We recognise there are borrowers who like the flexibility of keeping monthly payments low due to the more complex way in which they receive income and manage their finances. In doing this we remain prudent and ask that these borrowers earn over £40,000 a year as well as having a repayment vehicle check.”

Interest-only borrowers must show Skipton they have a repayment strategy, which may be linked to an investment such as an endowment or equities or property portfolio that has a projected value sufficient to repay the loan. Equity in another property may also be used.

But far from viewing this as a light at the end of the tunnel, brokers do not see interest-only lending gaining traction for the foreseeable future.

John Charcol senior technical manager Ray Boulger says: “It is almost irrelevant that Skipton has raised its interest-only LTVs because if people still cannot prove their repayment strategy, what difference does it make?”

When the FSA published its mortgage market discussion paper in 2009, it said it would require much more “stringent” rules for interest-only mortgages. This led many lenders to restrict their interest-only criteria, with 50 per cent or pulling out of the sector altogether.

The final MMR rules state that interest-only mortgages are only suitable for borrowers who show a clear repayment strategy, which may be linked to a pension, investments or savings.

FCA chief executive Martin Wheatley, after referring to an interest-only mortgage last March as a “ticking time bomb”, then raised concerns that lenders may have withdrawn too hastily from interest-only lending over “concerns about retrospective regulatory judgements”.

But the damage may have already been done. Data from comparison website Moneyfacts.co.uk shows the number of lenders offering interest-only mortgages fell from 52 in February 2009 to just 22 at 27 February 2014.

Perception Finance managing director David Sheppard says: “Any broker will tell you there is definitely a place for interest-only mortgages.

“It may have been the case that interest-only was used too readily in the past by people without any real strategy for how they were going to repay. But there are a lot of people that would still benefit from interest-only but cannot get it.”

London & Country associate communications director David Holling-worth says: “For the right borrower there is nothing wrong with interest-only and I am sure the FCA would agree.

“The reality, though, is that the regulator has made it very difficult to get an interest-only mortgage now, so for many borrowers repayment is going to have to be the default option.”

Your Mortgage Decisions director Dominik Lipnicki points out the withdrawal from interest-only hits existing borrowers when they come to remortgage. He also says there are valid circumstances when recommending interest-only is the best advice. 

“Take a trainee barrister – they will start on a low salary but have a clearly defined career path and earning potential in front of them. That is a case where interest-only is suitable because the borrower will be in an improved financial position once they have passed their training and will realistically be able to pay down their mortgage. 

“It seems to me we have thrown the baby out with the bath water. Lenders became scared to touch anything to do with interest-only, fearing it was the next big scandal. The pendulum has swung too far the other way.”

Hollingworth agrees there has been too much of a contraction in the sector. He says: “The problem was around a lot of borrowers using interest-only to all intents and purposes as a cheap mortgage. But evidence has shown that a vast majority had their repayment plans in place, suggesting there is a good understanding of the product.”

Sheppard also believes regulation of the interest-only sector has gone “way beyond” its intended outcome. He says: “There was just a rush of information coming out from the regulator about it not liking the level of interest-only mortgage lending, without any constructive advice.

“It would have been more sensible for the regulator to establish its position and then make recommendations. What we have seen instead has been the natural reaction to somebody shouting that there is a fire in the building – everyone runs out.”

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