Mortgage News
Interest-only: the beginning of the end?
With big and small lenders tightening interest-only criteria and pushing up rates, how much longer before interest-only deals become a truly niche product?
Examining the issue in this week’s Market Watch are:
Paul Broadhead, head of mortgage policy at the Building Societies Association
Alan Gravett, head of sales & marketing at Teachers Building Society
Dominic Hennessy, principal at Just Us Financial Solutions
Industry, not regulation, must lead later life lending change
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Paul Broadhead, head of mortgage policy at the Building Societies Association
Interest-only mortgages have been a feature of the UK mortgage market for many years.
On one hand they have helped to provide flexibility for consumers in structuring their finances and this has worked well for many borrowers.
On the other hand there have almost certainly been some instances where the borrowers’ capital repayment strategy was not adequately considered.
Right now it is not totally clear how the FSA truly views interest-only.
It does not actually confirm whether it prefers this form of lending as a niche product, or as a mainstream offering. This is causing some uncertainty amongst firms as to what the regulator is really expecting in terms of the lending strategy for interest-only.
In response, a number of larger lenders have already changed their criteria.
Looking forward, it is likely that other lenders – irrespective of size or type – will follow-suit at some stage. Even if they wish to retain the interest-only option, they will need to manage volumes and exposure to what is clearly now considered a riskier form of lending.
In my view the ripple effect is inevitable and the market will take time to adjust and for interest-only to find its place again. It would be helpful to have the FSA’s confirmation as to where it sees that place being.
Alan Gravett, head of sales & marketing at Teachers Building Society
Teachers Building Society has now lowered the maximum LTV on interest-only mortgages to 50%, both direct and via intermediaries.
We strive to do all we can for mortgage customers, whether they are remortgaging, moving home or buying for the first time, but obviously we have a duty of care to lend responsibly and are mindful of the tighter controls being applied by the regulator, so must balance our mortgage products accordingly.
Lending mainly to teachers and education professionals, our experience is that most customers prefer a repayment mortgage anyway as it tends to be viewed as the more prudent option.
We treat each case on an individual basis, assessing affordability and offering customers every available option from our product range.
When interest-only is requested, we’re happy to provide it as long as the borrower is not a first-time buyer or will be older than 75 at the end of the mortgage term.
With many lenders currently announcing stricter criteria for interest-only products, we expect other building societies to follow suit.
Dominic Hennessy, principal at Just Us Financial Solutions
The wave of restrictive lending criteria triggered by Santander’s change of policy in mid-February is washing through the mortgage market.
Nationwide and Coventry have followed suit down to 50% and Skipton down to 60% LTV. These have been three of the largest mutual players in 2012 so far. NatWest also “temporarily” withdrew interest-only through brokers last week.
Lenders simply don’t have the capacity to deal with the demand that is out there.
This year got off to an absolute flyer and many lenders quickly found themselves well ahead of their lending targets for the year.
The changes in interest-only criteria, dual pricing, upward pricing of products and increased underwriting requirements have put pressure on our mutuals, so they are having to follow suit.
The news we read and are feeling in the broker market is a little like March 2008 when dual-pricing also first reared it’s gruesome head. That said it does seem that such restrictions on interest-only can only be viewed as a temporary matter.
It is difficult to visualise a future where lenders ultimately aren’t lending more aggressively again. It’s just a question of how you define ‘temporary’ these days.