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Interest-only comeback as ‘source of cheap borrowing’ – Bank of England analyst

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  • 15/02/2018
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Interest-only comeback as ‘source of cheap borrowing’ – Bank of England analyst
The interest-only sector is “starting to show signs of life again” having tumbled in the aftermath of the financial crisis, according to a member of the Bank of England's (BoE) retail credit risk team.

 

Analysis by the BoE’s Sachin Galaiya highlights that according to mortgage lending and administration return (MLAR) figures from the Financial Conduct Authority (FCA), the number of interest-only products as a proportion of new lending climbed to 9% in 2017.

Indeed the value of interest-only lending rose 45% year-on-year to £5.4bn in Q3 of last year.

However, that figure is still a fraction of its previous height of 42% in 2007. It collapsed to just 7% in 2016.

Galaiya said interest-only products have become a niche because of more stringent underwriting standards on affordability, and requirements for “credible” repayment strategies for outstanding capital which came in after the crisis.

“The interest-only product has undergone tremendous evolution, from its mass-market glory days in the run-up to the crisis, to its rebirth as a niche product,” wrote Galaiya.

But the figures suggest that lender interest in the product is being reignited.

He continued: “However, since reaching a low-point in 2016, the interest-only market is starting to show signs of life again as lenders re-enter the market.”

“The combination of shorter mortgage terms and low loan to values (LTVs) suggest that borrowers are now using the product as a source of cheap borrowing for other purposes, rather than solely for house purchase,” Galaiya added.

 

Relaxed

Temple Capital Finance director, Arron Bardoe, has not been seeing the rise in interest-only, but suggested that the uptick in the MLAR data was likely a result of changing definitions of later life lending, meeting affordability, and a general relaxing of criteria following the credit crunch.

“I think partly it’s lending into retirement, where FCA rules have changed,” Bardoe commented.

He continued: “Previously mainstream banks weren’t lending beyond 70, but more and more are considering it. Besides, it’s no longer classed as lifetime mortgages, but as normal residential loans.

“I wouldn’t be surprised that one or two percentage points are based on that.”

“The products are also probably being sold to meet the affordability requirements of the lender or the borrower,” he said.

“Lenders are also relaxing the rules,” Bardoe added. “With the crunch, they stopped doing interest-only altogether, although it’s suitable for some.”

 

Still too strict

However, managing director at Emerald Finance, Matt Sutton, said that he has indeed been seeing more interest-only cases.

“We’ve definitely seen an increase,” said Sutton. “Not so much a flurry of lenders, but definitely a trickle of lenders coming in.”

He continued: “It’s a slow adaptation to customer demand, with more lenders relaxing their criteria slightly and lending on interest-only basis on a higher LTV than previously.”

Sutton added: “Although it has increased, it is still considered safe lending as the necessary checks are in place now to verify sufficient equity and earnings.

“If anything, I’d say it’s still a little too strict, but I think it’s heading in the right direction again.”

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