Although some interest-only mortgages may have been bought with insufficient consideration of repayment, for a sizable minority of borrowers, an interest-only mortgage is sensible and efficient financial planning. Therefore, one impact of the current much tighter criteria is that many borrowers for whom such a mortgage might be suitable are finding it is not an option.
There are ways of mitigating the problem and Clydesdale’s new ‘low-start’ repayment mortgage, with the first three years on interest-only at a fixed rate, is a helpful additional option.
Its minimum loan size of £100,000 and maximum LTV of 80 per cent compare favourably with the £300,000 minimum and 50 per cent maximum (if the repayment strategy is the sale of the property) on its interest-only criteria.
The interest rates are respectable but not market-leading, and part of the trade-off for a lender prepared to offer a niche facility like this is that ultra-competitive rates are not necessary.
Particularly important is that, by definition, everyone automatically satisfies the required repayment strategy, whereas strategies acceptable to many lenders are so restrictive that few borrowers qualify for interest-only, even if the required LTV is low.
Because this is a repayment mortgage, Clydesdale underwrites applications on the same basis as any other repayment mortgage. Therefore, the maximum loan will not be higher simply because payments for the first three years are on interest-only.
In fact, for any given term, the maximum loan will be lower because the affordability calculation needs to allow for the fact that the repayment period is three years shorter.
However, Clydesdale’s maximum loan term is 40 years, subject to its rather restrictive maximum age of 65 at the end of the term. Therefore, borrowers young enough to do so could select a longer mortgage term than they might otherwise in order to enhance the lender’s affordability calculation as well as mitigate the increase in monthly repayments after three years.
Borrowers can overpay, of course, even during the fixed-rate period, with overpayments up to 10 per cent per annum allowed ERC-free as usual. When the fixed rate ends, the mortgage reverts to Clydesdale’s SVR but, as this is relatively high at 4.95 per cent, most borrowers will want to renegotiate their mortgage after three years, either with a product transfer or by remortgaging. This is a good opportunity to reassess the customer’s options.
The mortgage will only be available through brokers on Clydesdale’s panel and on an advised basis, so borrowers should be made well aware of the fact that monthly payments will increase significantly once the three-year fixed rate has expired. Additionally, they need to be comfortable with this knowledge.
Ray Boulger is senior technical manager at John Charcol