In light of recent developments with Santander and Halifax getting tough on interest-only borrowing, now is as good a time as ever for this range of products to be scrutinised for both their suitability to consumers and the way in which brokers are advising on them.
There are significant differences between lenders in terms of offering when it comes to interest-only ranges, so it is vital that intermediaries are as well informed as possible, now that these changes have been implemented.
Whilst the outlook for interest-only products remains uncertain at present, it is not all bad news that lending has been reined in slightly, as these products clearly were not suitable for everyone.
Although interest only is not actually being banned, December’s Mortgage Market Review (MMR) paper rightly made it very clear that it is still valid for informed borrowers with a credible repayment strategy that can be clearly demonstrated.
However, interest only obviously does pose a significantly higher risk to lenders causing many to review their offerings.
The market has already adjusted naturally, to a great extent, with the number of mortgages taken out in 2011 on an interest-only basis significantly down on the last few years – and that’s before the recent lender policy changes (see table).
| Percentage of loans taken out on interest-only basis | ||||
| Year | FTBs | Homemover | All Purchase | Remortgage |
| 2007 | 29% | 35% | 33% | 31% |
| 2008 | 24% | 34% | 30% | 31% |
| 2009 | 9% | 25% | 19% | 27% |
| 2010 | 8% | 21% | 17% | 23% |
| 2011 | 4% | 16% | 11% | 19% |
| Source: CML | ||||
Just in case you missed it, the following are the most recent changes announced by lenders:
Abbey: It has reduced the maximum that it will allow on interest only from 75% to 50% LTV.
Lloyds Banking Group: It will no longer accept cash savings, including ISAs. Other non-cash repayment vehicles, such as stocks and shares ISA, pensions and unit trusts, remain acceptable but face much tougher treatment in terms of how much can be borrowed against them.
Clydesdale Bank: It has reduced the maximum LTV from 75% to 50% for certain repayment vehicles – namely cash savings or downsizing. Inheritance, overpayments and future conversion to a capital and interest mortgage are all unacceptable, but other repayment strategies will be considered on an individual basis.
Taking all these factors into account, the question remains as to which lenders are still accepting interest-only business.
Although interest only is not right for everyone, many brokers would rightly argue that lenders are overreacting and will cite many examples of customers where an interest-only strategy seems to make perfect sense.
Customers know that if you borrow money, you have to pay it back, so extra emphasis is also placed on borrowers’ taking more responsibility. They also need to be trusted to be disciplined enough to repay capital over time.
Accord Mortgages probably has one of the more flexible approaches and currently still allows 75% on a range of repayment vehicles such as ISA/PEP, endowment, pension and other strategies including regular or lump sum overpayments, sale of second property or the proceeds from sale of main residence before the end of the mortgage term.
This is yet another area where the mutuals’ approach to lending with real life underwriters can be worth a look.
For example, Principality Building Society, as well as accepting a number of repayment vehicles up to 75% on interest only, will allow a mix of interest only and capital and interest for loans above 75%.
Nottingham Building Society goes even further to 80% LTV and, again, will accept part interest only and part capital and interest.
Interestingly, Kensington recently wrote to a number of brokers chosen at random, asking for evidence that plans were in place and on track to repay the mortgage at the end of the term.
We see that the processes and checks that will be required – and the increased costs involved – when MMR is eventually implemented may make interest only prohibitive for some and, therefore, this might become a niche opportunity that some lenders will price for (+25/50bps on the rate for example).
We certainly expect further changes and developments to interest-only products, but do not expect that this will affect the appetite among some consumers.
As lenders are committed to revising their product strategies, interest only is still far from dead. We as an industry just need to make sure that the right products are being offered to the right people.
