Could this kind of initiative help brokers initiate remortgage discussions with clients? How easy is the discussion to convert customers to a more expensive repayment loan?
Name: Paul Shearman
Company: Openwork
Most clients who take out an interest -only mortgage do so because of affordability issues and are fully aware of the additional risks that it has over capital repayment.
In the majority of cases, clients will have future plans to ensure that the funds are available, including investments, a future inheritance, bonuses, selling the property or converting to a capital repayment basis at a later stage.
However, many clients do not stick to their original plans, spending their savings or bonuses on other things, or their plans are knocked off track by poorer investment returns than originally hoped for.
Our campaign is designed to remind clients who have a mortgage on an interest-only basis that at some point, they need to repay this debt and should regularly review whether their plans are on track and, if not, take action sooner rather than later.
Some clients will have a clear repayment strategy and therefore no action is necessary; others may need a wake-up call to reassess their approach.
For some, now may be the right time to switch to a capital repayment. This will result in higher payments, but with today’s low interest rates, the payments may still be affordable, the true cost of the mortgage will reduce and they will have the peace of mind that the debt will be repaid at the end of the term.
If affordability is still an issue, they may want to consider converting part of the mortgage to capital repayment, which may result in a remortgage with a different lender.
Name: Melanie Bien
Company: Private Finance
Several lenders are cracking down on interest-only loans because they regard them as risky, while the FSA has also voiced concerns. This has resulted in reductions in maximum LTVs, a restriction in the repayment vehicles deemed acceptable, and, in one case, charging a premium on the rate when opting for interest-only rather than capital and repayment.
Interest-only mortgages have become increasingly popular with borrowers who see them as a way of saving money. There has been a big increase in first-time buyers opting for interest-only as a way of reducing their monthly costs, without thinking about repaying the capital.
But this is only part of it. Other borrowers opt for interest-only as a way of managing their money: they might be able to afford to pay cash for a property but choose not to, keeping it in reserve and opting for interest-only with the aim of paying off the loan in a few years. Those with relatively low income but high bonuses also like interest-only because they intend to pay back the capital in chunks, well ahead of the typical 25-year term.
However, brokers should identify clients who are on interest-only but not happy about it. Perhaps they did it for affordability reasons with no thought about how they were going to pay back the loan. But even if they want to switch, the cost of a repayment mortgage may still be prohibitive.
It is certainly worth a discussion. But wealthy borrowers or those in receipt of bonus income are unlikely to change their well-thought out strategy for the sake of saving the cost of an administration fee.
Name: Mark Glithero
Company: Thomas Oliver UK
Interest-only mortgages undoubtedly have a place in the market, particularly for buy-to-let where the sale of the investment property to repay the mortgage is not an issue. When the mortgage is on the family home, however, it is vital that a robust repayment strategy is in place. The problem is, of course, that too often that credible plan is not – or is no longer – there.
Most borrowers choose an interest-only mortgage because it is initially cheaper. They become accustomed to lower payments and perhaps let their original plans slip or perpetually delay switching to the capital repayment loan they initially intended to move to within a few years.
Openwork’s initiative gives advisers a reason to get in touch with clients to remind them of their obligations.
The priority is to emphasise the benefits of moving to a repayment mortgage: clients need to understand that delaying the move will only make future payments more painful and that they are unlikely to find a better time to switch. Interest rates are only going in one direction.
Telling a client that they have an inadequate plan in place is not an enjoyable conversation, but waiving the fee removes a major obstacle to switching and reinforces that there is genuine concern about borrowers’ ability to repay their debt. That is a powerful combination.
These conversations will be more straightforward for advisers who keep in close contact with clients. But regardless, it is incumbent upon advisers to check that their interest-only clients have a feasible repayment plan in place.
