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Martin Wade: The first step towards sensible interest-only lending

Martin Wade MM blog

There was welcome news earlier this week from Santander when they eased their criteria on interest only lending.

This is but a small step on the way towards the balanced approach that the mortgage market requires in order to service the 1.5 million borrowers who have come to be known as mortgage prisoners.

We are all aware of the problem, most of us have our own suggestions for solving the problem, some are even printable here.

The fact of the matter is, once again, that it is not necessarily in the interest of the banks to change their stance. In many cases they have secured a long term customer, albeit a reluctant one, who with nowhere else to go is locked into an unattractive SVR with little flexibility, save for a positive change in their personal circumstance, for the remainder of their mortgage.

These clients have a low default trend and therefore the banks have locked in a profitable low cost line of lending without fear of having to remain competitive in order to retain the business.

Our whole industry has taken a good look at itself and reality has kicked in. We all appreciate that the practices and criteria of the past were unsustainable and have no place in the future but the fact remains that for many people, for a period in their life, interest only is an excellent solution.

Career breaks for starting a family, reduced hours for studying or to get a better work life balance are all things most people aspire to and by temporarily reducing outgoings become achievable.

I have yet to meet any client who actively wants a mortgage on their main residence when they retire so most people are already tuned in to the fact that this large debt needs repaying.

As mortgage advisers, it is our duty of care to ensure that our clients are actively reminded to switch back to repayment when the time comes, make those overpayments from the start and review their priorities!

It is true that nearly 80 per cent of these borrowers have made no provision for repaying their loans other than sticking their heads in the sand and claiming they will downsize. We are all only too well aware that interest only is not the sensible route for the life of a mortgage but in reality, for some, ultimately downsizing to pay off their loan is the only route they have left.

What we need now is a more balanced approach and we await the arrival of a brave lender who can recognise that there is a gaping hole in the market which, with sensible provision and precaution can be filled with a product which will meet the requirements of sensible lending within the bounds of the MMR yet also offer a lending lifeline to many. And if it attracts a quarter percentage point additional margin for the duration then that would seem reasonable.

Martin Wade is director of Your Mortgage Decisions

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. It is unbelievable that crap like this gets written, never mind that advisers actually believe this tripe. The reason there is a low default rate is because mortgages are so cheap at the moment and these borrowers are not paying into any form of repayment plan.

    As the FSA have said, IO are niche products and unless you get with the flow, claim chasers will make a killing from advisers like this.

  2. Mr Trot, there is no way that miss selling will be levied against mortgage advisors, it would financially destitute most banks as the figures involved are astronomic for potential redress. This will be buried by the courts at the behest of their chums in the banking game.

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