Q: In the past couple of years all major lenders have dramatically scaled back their interest-only products and restricted criteria? Is interest-only now gone for good?
A: The interest-only sector has seen significant change since the onset of the financial crisis and as the industry prepares itself for the implementation of the Mortgage Market Review next April, lenders will be working closely with intermediaries to meet the requirements around interest-only lending.
According to the FSA’s consultation paper on MMR released in 2011, 33% of all residential mortgages in 2007 were sold on an interest-only basis but the market reduced dramatically in the years that followed and we’ve seen further criteria tightening over the past 12 months in particular.
There remains a clear need for interest-only mortgages from some borrowers, however, and the regulator acknowledged this in its final policy statement on MMR last year when it said it recognised that ‘interest-only mortgages can be appropriate in a wide variety of circumstances’.
We believe that there remains a place for interest-only in today’s market, provided the correct controls are in place. All our interest-only lending is assessed on a capital repayment basis to ensure affordability, and we rigorously assess plausibility and undertake sampling to ensure interest-only borrowers have a credible repayment strategy in place.
Abbey for Intermediaries continues to lend up to 50% LTV for residential interest-only borrowing and since November last year, we’ve also been lending up to 75% LTV on ‘part and part’ applications, provided the interest-only amount is not greater than 50% LTV and the remainder of the borrowing is on a capital and interest basis.
This move was designed to offer new and existing interest-only borrowers greater flexibility, whether they are moving home or remortgaging to us from another lender. While the majority of our lending continues to be undertaken on a capital repayment basis, offering this flexibility has understandably proved popular with both intermediaries and their clients.
The goal of the MMR is ultimately to ensure the mortgage market is sustainable and works better for consumers. We will be working hard to support our intermediary partners through the transitional months ahead and a key part of this will be working together to support interest-only borrowers in today’s market.
