Discussing the issue in this week’s Market Watch are:
Andrew Montlake, communications director at Coreco argues that interest-only changes in the market place rely on two important factors.
Paul Winter, CEO of Ipswich Building Society examines whether lenders will turn back to earlier times and charge more for an interest-only mortgage.
Martyn Smith, head of mortgage products at the Legal & General Network backs Winter’s argument that interest-only deals will require a lengthier process, more regular checks in place, and a slightly loaded pay rate.
Andrew Montlake, communications director at Coreco
It was a brave move by Nationwide to ban interest only for all new borrowers. Whilst the line from other lenders will initially be that they are comfortable with their current stance, whether or not there is any future movement depends on two things.
The simplest measure will be whether there is a knock on effect to other lenders and they see an increase in interest only business as a result. They may be comfortable at current levels, but if these levels increase beyond what they deem to be a comfortable level, they may not have a choice other than to review their position.
More complex will be the discussions that happen behind the scenes when the FSA visits a lender. Whilst there is no outright ban in the MMR and publicly the FSA has taken a more relaxed approach saying it is up to the lenders to decide, I get the impression that a more robust conversation is taking place during these visits.
If lenders have to put in to place teams to periodically check how repayment vehicles are performing each year there is a massive training and therefore cost implication, as most lenders will simply not have the staff qualified to do this at present. Whether it therefore just becomes simpler to pull out of the market rather than take the responsibility on themselves is another huge factor.
Paul Winter, CEO of Ipswich Building Society
Interest-only is much less of a mainstream product than it used to be. I’m sure it will continue to be used in the right circumstances, particularly by smaller lenders who focus more attention on underwriting each case individually.
I expect to see some other lenders follow Nationwide but I hope that regulators won’t use the mutual’s decision to put more pressure on those who wish to continue using interest only as an option where appropriate.
It is unlikely that anyone will be looking to ‘take up the slack’ and increase their market share of interest-only lending if only because of the additional administration work required.
Could we see a return to earlier times when borrowers were charged extra for an interest only loan?
Building societies will I am sure carry on their traditional practice of trying to help as many people as possible to get on the housing ladder. At Ipswich Building Society we believe that used correctly, interest only has a role to play and we will continue offering it.
Martyn Smith, head of mortgage products at the Legal & General Network
The interest-only landscape has been re-writing itself over the last 12 months or so with the recent move by Nationwide possibly the most radical change yet from a big mainstream lender. This change was not a complete surprise and with a significantly reduced number of interest-only mortgages being taken over the last 12 months, fewer people will be impacted compared to a year ago.
What next? When a lender makes a policy change – particularly a lender with a large market share – other lenders, whilst not necessarily wanting to immediately follow suit, will be watching daily to ensure that they are not being selected against.
Whilst it is impossible to predict exactly what the next move will be, this area of the market will continue to see changes over the coming months. Lenders that are prepared to invest time and put the necessary checks and balances in place to ensure that interest-only is used when appropriate might see this as an opportunity.
There has for some time been a view that interest-only would end up as a niche product, with a lengthier process and more regular checks in place, and a slightly loaded pay rate. Nationwide’s announcement last week could trigger this change.