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Think about a world without interest-only

by: Ian Gray
  • 05/10/2012
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Think about a world without interest-only
Is the Nationwide's recent decision to ban all new interest-only lending a sign of things to come?

When Santander reverted to a 50% LTV cap on interest-only a few months ago, it didn’t take two weeks for most of the high street to follow suit.

In many other countries, interest-only lending is unheard of for residential mortgages. Any repayment strategy involving the risk that your mortgage might not be repaid is considered an unacceptable one when it involves the borrower/investor’s own home.

We deal with about 40 private banks, introducing clients for mortgages and wealth management often comes out of the introduction. The private banks haven’t followed suit on this interest-only bandwagon, and still typically offer mortgages on a five-year interest-only term. Their clients tend to be wealthier and pay off their mortgages within five to seven years anyway with other resources.

We often have mortgage brokers calling to see if we can get an interest-only mortgage with a private bank for their clients. The problem can be, in certain cases, that the clients don’t fit the target profile for the private bank. There has to be either investable wealth from the start, or a clear corridor to this, to make them interested in taking the client on. Therefore, I think it’s prudent for the mainstream population to prepare for the day when we don’t have interest-only mortgages on the high street anymore.

The Nationwide has indicated that existing mortgage-holders will be unaffected unless they ask for a further advance. Some people might wonder whether banks will start forcing their mortgage customers onto a repayment loan in the future, such is their apparent dislike for interest-only debt on their books. I should think it won’t happen anytime soon. It would take a pretty creative interpretation of the “small print” on a mortgage contract to justify altering the terms midway through a mortgage term. We’ve seen it before with private banks in extreme cases, but never with high street lenders.

I do predict that other banks will follow suit in the coming months, if only to avoid being one of the only leftover banks accepting these kinds of applications. As brokers, we need to prepare for this and start talking to our clients about a backup plan, should they be planning a house move or remortgage in the next little while, in case they’re assuming it will be OK to get the new loan on an interest-only structure.

Ian Gray, senior partner,

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