Giving their view in this week’s Market Watch are:
Kevin Fowler, managing director of Platinum Finance
Sally Laker, managing director of Mortgage Intelligence
Mark Harris, chief executive of SPF Private Clients
Kevin Fowler, managing director of Platinum Finance
Where interest only is concerned, I feel that the FSA and most of the lender community has thrown the baby out with the bath water.
There seems to be a lot of low-brow commentary around the “risks” of interest only and supporting repayment vehicle, but I think many clients would find these arguments quite patronising.
If you are running your own business and paying yourself a salary plus a dividend, you might prefer to keep your monthly commitments as low as possible and then make a lump sum reduction at the end of your trading year.
That strategy might not work out and you might not repay the mortgage over the intended period, but in that scenario I doubt you will feel disappointed you hadn’t been on a capital repayment mortgage during that period.
Consider a high-risk client aged say 25. This client feels bullish about the market and wants to use 100% of his monthly “affordability” to fund a mortgage interest payment rather than capital repayment or indeed an acceptable monthly savings product.
For the same monthly commitment, he can borrow significantly more by adopting the interest-only strategy and therefore purchase a higher value property (lender affordability calculators allowing).
In a rising market, he would be rewarded with more equity than if he had purchased the cheaper property.
Similarly, there is a fairly one-sided debate going about the unsuitability of many repayment vehicles and many practitioners will lament a further shrinking in client mortgage options.
In protecting 60-year-old taxi drivers from the perils of interest-only, self-cert right-to-buys, we seem to have forgotten that interest only can be a legitimate and advanced financial planning tool.
Sally Laker, managing director of Mortgage Intelligence
For those of us that were around when interest only was only available as part of a package that contained a repayment vehicle, this all seems rather familiar.
The previous success of that scheme was the link to endowment policies that were assigned to the lender, with anticipated growth rates of 10% to 12.5%, but because of tax relief on interest it made it the cheapest way of repaying a mortgage.
As we all know, it was impossible to see into the future and, as the reasons for endowments’ very existence fell away, we continued to offer interest-only mortgages, but with no thought of whether that left a hole.
Now, in a tougher financial environment and unfortunately a claims culture, we all have to rethink and reinvent the way forward.
I am a true advocate for interest only in offset, as it enables people to manage their finances by using their mortgage as a tool.
Sadly, this looks as though it is likely to be an icon of the past, as the hoops that lenders and borrowers have to go through are so vast.
Lenders are under enormous pressure to maintain a clear affordability strategy and something with no repayment method written in stone feels uncomfortable.
The one thing that I find difficult in all of this is that, if the client is responsible enough to take on the largest financial transaction of their life and with all these affordability measures in place, I do hope we are allowed to accept that it is the client’s responsibility to actually repay it.
Mark Harris, chief executive of SPF Private Clients
There has been much handwringing and gnashing of teeth among the broker community regarding the changes to interest-only borrowing that some lenders have introduced recently.
But is it all bad news? On the contrary, I would argue that it presents an opportunity for brokers.
Interest only has become so commonplace – accounting for a third of all mortgage sales at the peak of the market, according to the FSA – that people forget it has only been around a relatively short time and was always designed as a high-net-worth product in the first instance.
The recent changes are simply recognising that and taking us back to where we were.
It is increasingly difficult to borrow on an interest-only basis, which means less choice and flexibility for borrowers.
However, it also means more opportunities for brokers as the more sophisticated borrower who simply does not want a repayment mortgage will require advice on interest only.
Interest-only borrowing is not necessarily reckless.
Reducing the number of acceptable repayment vehicles or limiting loan sizes or LTV bands is a rather blunt instrument used by high-street lenders. Decisions should be made on an individual case-by-case basis, but lenders on this scale cannot operate in this way.
It all plays into the hands of the private banks on larger loans; their usual terms are five years with a reviewable facility, rather than a 25-year repayment commitment, enabling them to offer interest only.
As private banks get to know their client, they can assure themselves that the client is not reckless and has a repayment strategy in place, even if it wouldn’t satisfy every high-street lender.
