You are here: Home - News -

What impact will the interest-only crack down have?

by: Mortgage Solutions
  • 13/04/2011
  • 0
What impact will the interest-only crack down have?
Interest-only mortgages are being increasingly restricted by lenders. What is your policy and why? What impact do the criteria constraints have on the market?

Tackling the issue in this week’s Market Watch are:

Mike Jones, sales director of Lloyds Banking Group

Andrew Baddeley-Chappell, head of mortgage strategy and policy at Nationwide

Andy Pratt, chief operating officer of Alexander Hall

Mike Jones, sales director of mortgages at Lloyds Banking Group

At the end of March, we aligned the maximum LTV for interest-only business at 75% across Lloyds Banking Group, meaning that we had one policy in place across all of our mortgage brands, both in branches and through intermediaries.

Borrowing on an interest-only basis comes with additional risks and responsibilities. Taking a capital repayment mortgage is the only way that borrowers can guarantee that they will repay the total amount at the end of the term. That’s why it was important that we took the steps we did last year, such as clarifying which repayment vehicles are acceptable and encouraging borrowers to regularly review their plans.

Criteria changes on interest only have not been made only to serve lenders’ interests. It’s just as important for the borrower, as it is the lender, to ensure that a suitable repayment strategy is in place to pay the capital at the end of the term.

It’s important to note that in making these decisions, it was not because we had borrowers being unable to repay their debt at the end of the term.

Most borrowers are in a strong position at the end of the term. But it’s our job as a responsible lender to do what we can to keep it that way.

Interest only should not be considered simply a cheaper alternative to repayment mortgages.

Yes, they result in lower monthly payments, but we cannot negate that extra responsibility borrowers have in borrowing on this basis.

We know that brokers understand the greater risk that’s associated with this type of lending and they too have a real role to play to work alongside to ensure that where we’re lending on an interest-only basis, we’re doing so responsibly.

Andrew Baddeley-Chappell, head of mortgage strategy and policy at Nationwide

The discussions on interest only mirror the wider debates on the future shape of the residential credit market.

At the heart of this debate are two questions: to what extent should the regulator protect customers at the expense of personal choice?; and to what extent can regulators deliver efficient regulation that prevents poor lending but does not inhibit good lending?

For interest only there are no easy answers.

The Policis research undertaken for the CML showed that many borrowers were adopting a more flexible approach to home ownership and mortgage debt. Interest only formed part of some strategies and its conclusion was that it was both appropriate and efficient for many, but inappropriate for some in particular a group of older, less financially aware borrowers.

Clearly, interest only has the potential to leave some borrowers with substantial debt. Evidence of an issue arising as a result appears limited. The risk is that the current generation may be too late in finding they have issues in repaying their mortgage.

Whilst they will have benefitted from more disposable income earlier in life, they may find themselves in retirement in rented accommodation rather than their own home. However, this may still be an acceptable strategy.

Having first ducked the issue in its original Mortgage Market Review Discussion Paper DP 09/3 (which I have some sympathy with), the FSA is now seeking to deliver a reasonable compromise – increasing certainty at the loss of some customer choice.

It is still not clear how it can do this against the two key questions that I have raised.

Whilst the FSA is facing this challenge, other regulators are also looking at this area. The EU appears to be placing it outside the scope of its recent credit directive (and so keeping lifetime mortgages and buy to let out of scope) whilst the Financial Stability Board’s recent report also noted the risk of interest only, in particular when risk layering was also involved.

Andy Pratt, chief operating officer of Alexander Hall

As a broker, our policy on interest only will always be led by the lenders operating in this part of the market.

As the lenders have tightened their lending policy the choice for customers has become more restricted. It is also important to recognise that the approach to interest only across the lenders is now very inconsistent and hence it requires greater research.

However, this plays to the strength of the broker who can look across their available product range and provide advice on the customer’s interest-only options and compare against other repayment methods.

We recognise that in many cases, especially where the loan size is higher than the national average, the customer strategy on interest only is not necessarily straightforward. This includes the consideration for alternative solutions should their primary approach to repayment not cover the whole capital balance.

The approach that lenders have taken to putting LTV caps on interest only is understandable.

It does restrict options for some groups of customers, but overall is sensible lending prudence in managing the risk of the mortgage book. It would be good to see more innovation in this area, perhaps producing specific interest only products which are more suitable to this repayment strategy.

The current use of part and part is generally too restrictive, because many lenders require two booking fees to be paid. Product innovation in this area could stimulate more appropriate use of interest only, perhaps with a low start option for first-time buyers.

However, the approach to capping interest-only loans with a maximum loan size does not make sense and could be challenged on many levels.

The larger the loan, the larger the risk for the lender. Yet, this type of client is more likely to have assets or other means of paying off the capital balance at a later date.

There are 0 Comment(s)

You may also be interested in