NatWest announced its plans to re-enter interest-only while Kensington raised its loan-to-value (LTV) and offered a more flexible approach to repayment strategies. Both set their maximum LTVs at 75% and placed minimum income restrictions on applicants; Kensington at £75,000 and NatWest at £100,000, with further restrictions if the repayment strategy is to downsize.
On the face of it, this throwing open of the doors to interest-only borrowers appears encouraging – times are changing, all is forgiven. But, with minimum income restrictions skirting the £100,000 mark, it begs the question; how useful are these products?
This week we have asked our panel of broker experts to share their views on whether criteria set at this level for interest-only mortgages will help to reach the typical borrowers who needs them and what criteria should look like to provide borrowers with products suitable for wider circumstances.
John Phillips, national operations director of Just Mortgages, says that although these lenders are making cautious decisions about interest-only lending, there are plenty of high-net-worth borrowers who will benefit.
John Wickham, mortgage broker and owner of Hilton Wickham Associates, considers the latest offerings to be too restrictive, although welcome, and suggests changes which would make interest only more accessible.
Aaron Frizzel, group compliance director, Clear Mortgage Solutions, considers the plight of the interest-only mortgage prisoner and what changes are necessary to help their circumstances.
John Phillips is national operations director of Just Mortgages
Lenders coming back into the interest-only arena are a welcome return to sensible lending. The reaction after the credit crunch went a bit too far with the obliteration of new interest-only mortgages.
While we don’t want a return to irresponsible lending there are customers who have a genuine need for interest only, particularly high-net-worth customers who have different sources of income with which to clear their mortgage.
While the criteria is relatively restrictive at the moment, I expect this to relax as lenders become more comfortable with being back in this arena. We are in a safer place economically and there is much more competition in the market so I expect to see more lenders introduce interest-only products and, as a natural progression, the criteria will ease meeting the needs of more people.
Optimal criteria will make interest only available to all the people who really need it but must avoid being given to people who really will have no means to pay it off at the end of their term. However, regardless of the cautiousness of the criteria of these first two launches into interest only, this is a very welcome return and will help us to place more cases, especially for our high net worth customers.
John Wickham is a mortgage broker and owner of Hilton Wickham Associates
Residential interest-only mortgages may be good for applicants with an existing investment which has a target maturity value of the amount borrowed. Investment returns are not guaranteed, regular reviews are needed to ensure it is on target and top ups to the investment will be needed if not. Even though returns are not guaranteed these lenders seem to ‘approve’ this type of strategy.
But there are other borrowers who can benefit. Interest only may be good for applicants who are due to inherit money during their mortgage term.
For first-time buyers not used to monthly budgeting it may be of benefit, and once accustomed to budgeting they may decide to switch some or all of their mortgage to a capital and interest basis.
The offerings by these two lenders are somewhat restrictive, they are mainly aimed at high-net-worth individuals (or near to it) but this doesn’t guarantee that this applicant type won’t default.
If a non-high-net-worth applicant has money saved which is equivalent to or more than the borrowing amount and they don’t want to use it because they want to keep their security, then why can’t they borrow?
If an applicant could save a few hundred pounds per month by debt consolidating through an interest-only remortgage then why not accept this? They could use the surplus monthly savings to overpay the mortgage. Obviously advisers must take into consideration changing an unsecured debt to a secured debt, if this applies.
Interest only may help me place more cases but because of the restrictions I doubt it will have a significant impact.
Aaron Frizzel is group compliance director of Clear Mortgage Solutions
The lenders’ change in their criteria over the last few years has not reversed itself sufficiently to aid all current interest-only mortgage borrowers, nor does today’s general lending criteria offer suitable alternative solutions to these existing interest-only borrowers.
While the likes of Kensington and NatWest offer a solution for those earning at least £75,000 or £100,000, respectively, these exclude the majority of the working population and therefore offer no usable solution to most borrowers.
One specific problem is the issue of borrowers coming to the end of their mortgage term and finding themselves as mortgage prisoners. What would be helpful would be a near return to the lending criteria of previous years but a more robust verification process to qualify the validity of clients’ repayment strategies.
With current cases what would help interest-only mortgage prisoners would be their existing lender offering a level of understanding where serious consequences face the client when unable to repay their loan and a flex on their usual criteria to accommodate these circumstances.
Going forward there is a place for interest-only lending but it will require more lenders to rejoin this market to stimulate the development of more suitable and expansive criteria and products to tackle today’s problems.
