Does this change your strategy to the interest-only market?
Discussing the issue in this week’s Market Watch are:
Richard Adams, managing director of Stonebridge Group
Peter Curran, head of intermediary distribution at Lloyds Banking Group
David Copland, director of LSL’s mortgage services
Richard Adams, managing director of Stonebridge Group
Like all other mortgage products our strategy and that of our AR firms has, and continues to be, to use interest-only where it is appropriate to do so.
There are now borrowers who having taken out interest-only deals to find themselves without the means to be able to pay the capital. There has been much focus on the ability of those with interest-only mortgages reaching, or in, retirement – how do they fund their capital payment? The regulator is understandably concerned and is looking to mitigate against any repeat of this in the future.
However, this does not mean that interest-only has become inappropriate for all borrowers.
For example, with high net worth clients it is very easy to justify interest-only rather than repayment. The bulk of their money may come in a variety of forms, for example, annual bonuses and their money may work far better for them elsewhere rather than paying the capital on a mortgage.
I think the MMR recognises this and therefore, when the legacy issues around interest-only have been dealt with I expect us to get back to a stronger interest-only presence and more responsible offerings in this part of the market.
Peter Curran, head of intermediary distribution at Lloyds Banking Group
It’s an interesting challenge to explore whether the interest-only market will return, given that it’s actually never been away.
We carried out the initial review of our interest-only criteria in 2010. Over the last two years, there have been changes to criteria across the industry, but only one lender has announced its intention to stop lending to new customers on this basis.
The fact is that interest-only has not disappeared, but is going through a period of adaptation. The changes that we’re seeing in the market at the moment make sense. Lenders are making sure that borrowers can repay the capital at the end of the term. The new measures that many have introduced around LTV limits, or acceptable repayment vehicles, have seen a reduction in levels of interest-only lending, but the market is still there.
My view is that that there is a place for it in the future. That said, its role in the market is a niche proposition. Interest-only should not have been seen as a way of simply buying a bigger house, nor was selling your home ever an appropriate sole repayment strategy. But done in the right way, for the right customer, interest-only still has a place in the market.
David Copland, director of LSL’s mortgage services
There is no doubt that the interest-only option for residential mortgages did get out of hand. In many cases it was used for affordability and in some areas has contributed to house price inflation.
The pendulum currently has swung too far the other way and interest only will return and will possibly come back as an option to an a affordable capital and interest mortgage. I’m sure interest only does has a place, such as when people hit certain life circumstances like being made redundant or having a baby when their outgoings have suddenly gone up and moved out of kilter with their income.
Interest-only also has a place for high-net worth borrowers who have different arrangements for disposing of their assets. But the situation should not get back to the unsustainable position it was in before, where people were buying houses that were more expensive than they would otherwise have been and could only afford the houses they were buying because they were on interest only.
Our strategy will not change unduly if interest only does start to come back. As a responsible network, we will continue to test people’s exit strategies, to ensure that any mortgage they take out is affordable and they have a suitable repayment vehicle in place in order to pay off their mortgage when it reaches the end of its term.
