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Ray Boulger: Future of interest-only is uncertain

Ray Boulger

One critical aspect where Nationwide’s culling of interest-only differs from earlier criteria tightening is the negligible impact it will have on interest-only applications to other lenders. This is because the amount of business Nationwide is now writing on interest-only is tiny. Only 3 per cent of its new business is interest-only and furthermore the vast majority of that 3 per cent is to existing interest-only customers looking to port or switch. Therefore there is absolutely no need for other lenders to react to this, although of course some may do so.

Nationwide has historically written a much smaller proportion of its cases on interest-only than most lenders. However, the real reason its current percentage has fallen to 3 per cent has little to do with more customers preferring repayment as it claims, but all about much tighter interest-only criteria. If a lender wants to stop offering a product and justify it by saying it is only a small proportion of its business, reducing the proportion of possible applications by tightening criteria so that few people can actually apply is one way of doing so.

The final version of the mortgage market review is expected this month or next and with publication imminent, logic would suggest other lenders should digest the new interest-only rules before deciding whether or not to amend their current policy. However, as we all know logic is not a strong influence in the current market.

A significant factor in the interest-only changes is undoubtedly the far more onerous requirements placed on lenders in the draft MMR, both on underwriting and post-completion monitoring. The requirement to assess and monitor repayment strategies puts an additional work load, and hence cost, on the lender and requires skills many will not have in their back office, i.e. the ability to check and assess the suitability of investment vehicles.

Some lenders will see this additional cost as a reason not to offer interest-only mortgages. However, others may grab the opportunity to acquire good quality business where there is less competition and perhaps charge a slightly higher interest rate.

An anomaly of the draft MMR is that the FSA is rightly putting much more emphasis on borrowers taking advice, but it does not appear to trust the advisers (who it regulates) to offer and explain interest-only mortgages adequately. If the advice is that the most suitable mortgage is interest-only, the much stricter rules imposed on lenders by the regulator will often prevent the client from being able to follow that advice.

Nationwide is being fairer than most lenders in the way it continues to treat existing interest-only customers wanting to port their mortgage. Most lenders only allow this if the borrower meets their current criteria, which most will not. However, Nationwide’s more “mutual” interpretation of TCF means that it allows porting on interest-only up to 75 per cent LTV providing the borrower can still meet the interest-only criteria in place at the time the mortgage was originally approved, although any additional borrowing will have to be on a repayment basis. This is particularly useful for interest-only borrowers now paying Nationwide’s old SVR, capped at 2 per cent above bank rate for the remaining mortgage term.

However, the FSA is almost regulating interest-only out of existence without actually banning it.

Ray Boulger is senior technical manager of John Charcol

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Comments

There are 3 comments at the moment, we would love to hear your opinion too.

  1. As usual, good common sense, no-nonsense analysis by RB.

    “However, the FSA is almost regulating interest-only out of existence without actually banning it.”

    Yes indeed, and it is this mealy-mouthed, weasel words kind of approach by the regulator in so many areas of financial regulation, which attracts such scorn from advisers. The FSA have an unenviable reputation for never saying what they mean, or indeed meaning what they say.

  2. If I want to take an interest only mortgage, in the hope that my property will increase in value to the extent that I can downsize at some point and have no mortgage, isn’t that my prerogative? Who is the FSA or anyone else to gainsay it?

  3. The problem we have is that we now live in a ‘where’s there’s a claim there’s blame’ society.

    Personal responsibility is out of the window and the FSCS, FOS and PI are seen as a nice little earner when things go wrong.

    Why shouldnt I take out an interest only mortgage knowing full well the issues at the end of the term?

    After all how many people take out personal finance on expensive cars that depreciate straight away and waste ten of thousands of pounds over their life?

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