Examining the issue in this week’s Market Watch are:
John Heron, managing director of Paragon Mortgages
Ian Andrew, managing director of group intermediary sales, Nationwide
Rob Lankey, managing director of Aldermore Commercial Mortgages
John Heron, managing director of Paragon Mortgages
The pressure in the owner-occupied market to reduce interest-only mortgage products is being driven in part by the Mortgage Market Review (MMR), but more generally by the need for sustainable and responsible lending policies.
At the heart of this is the requirement from most consumers, possibly the majority, to own their property outright at the end of their mortgage term.
Buy-to-let is fundamentally different, the subject property is not the borrower’s home.
It is in the landlord’s interest to make their capital work as hard as possible and to make the most of the tax breaks available to them on private rented property.
For these reasons it does not make sense for a landlord to pay a mortgage down over time, but rather to maintain their loan at a sustainable level – relative to the rental income and costs.
For this reason interest-only lending is dominant in the buy-to-let market because it closely meets the borrower’s requirements.
In short, there has been no reduction in the availability of interest-only facilities in the buy-to-let market.
Ian Andrew, managing director of group intermediary sales, Nationwide
While the housing market continues to feel the pressure of Austerity Britain, things continue to look up for landlords and the buy-to-let market.
The last decade has seen a major shift towards many more people renting for the longer term, much like most of continental Europe, influenced in no small measure by a shrinking social housing sector, continued pressure on affordability and stricter lending requirements.
While this has been met with improved availability of products from selected buy-to-let providers, the sector has continued to see lenders acting more prudently. Today higher deposits are the general rule, lending criteria have become more comprehensive and the availability of interest-only loans has declined.
It is often experienced brokers who can make a real difference by highlighting the right deal quickly – taking into account the essential differences between landlord and owner-occupier.
The issue of ability to repay a mortgage at the end of the term remains a concern for some existing mortgage customers, and it is therefore right that the mortgage industry demonstrates caution over new residential lending.
However, for landlords, where the property itself is largely its own repayment vehicle, access to appropriate interest-only funding remains the primary way true buy-to-let loans can work successfully, delivering good customer outcomes for all.
Rob Lankey, managing director, Aldermore Commercial Mortgages
Those lenders who are serious players in the buy-to-let market will continue to offer landlords the option to have interest-only mortgages.
In the residential mortgage market the popularity of interest-only was primarily driven by borrowers desire to keep monthly repayments to a minimum and, in recent years, switching to interest-only has been a way for lenders to ensure struggling borrowers can keep up their mortgage payments.
But in the buy-to-let market the requirement for interest-only is driven primarily by tax considerations. Landlords can offset the interest payable on loans against tax, but they get no tax relief on capital repayments.
It therefore makes no sense for them to make regular capital repayments and most professional landlords will decide whether to refinance or sell and realise their asset, as their mortgage approaches the end of its term.
To rein in the use of interest-only in the buy-to-let market would pull the rug from under the feet of a large number of landlords and would have a serious and detrimental affect on the future prospects of the sector.
I haven’t heard any feedback from Aldermore’s brokers that lender concerns about interest-only deals have spread to the buy-to-let market.
