The trade body said some 29% of total redemptions had came from loans which were not set to mature until at least 2028. In most cases, where a new loan had been taken out, it was replaced by a repayment mortgage.
A widely publicised campaign to encourage lenders to engage with interest-only borrowers over their final redemptions appears to be paying off, as borrowers convert to repayment or part and part at the very least. But is this the only reason?
Lenders’ criteria, which has become more flexible since 2009 but still remains relatively tight, is a restricting factor. Meanwhile, consumers have become more savvy to the risks involved in taking out mortgages on an interest-only basis, having been exposed to a raft of headlines about ‘ticking timebombs’.
This week, we’ve asked our panel of experts to discuss who and what is driving the conversation around alternative repayment options.
Shaun Church, associate director of Private Finance, discusses the type of borrower most likely to consider switching from interest only to repayment before the expiry of the mortgage term.
Aaron Frizzel, business principle, Mortgage Advice Bureau, talks about the effects of a low interest rate environment on consumers’ attitudes to switching.
Mike Fitzgerald, sales director, Brentchase Financial Services, thinks lenders need to work on a consistent approach to helping borrowers switch away from interest only.
As a mid to high net worth broker, I have not seen a significant trend in my remortgage clients looking to switch to repayment mortgages. In my experience the vast majority of those with interest-only mortgages favour these arrangements and are not keen on the idea of switching. In this market segment I would suggest there has been an increase in demand for interest-only facilities as a result of them being more widely available.
Conversely, younger borrowers and first-time buyers tend be more concerned about how they will eventually repay their mortgage and this is an interesting cultural change compared to previous generations.
As advisers we have a duty of care to our clients to ensure they are making appropriate plans for the future. Whilst I have seen certain clients refinance from interest-only to repayment these have tended to be older borrowers where there is concern that the original repayment strategy might not be sufficient, or the reality of selling the house and downsizing is unattractive.
To a large extent, lenders’ criteria will ultimately determine what is and isn’t possible. Certain clients may have to take a part-and-part arrangement or full repayment loan to avoid sitting on the current lender SVR [Standard Variable Rate], even if this isn’t their preference.
When it comes to selecting the correct repayment method it is important to remember that all clients are different. Given the profile of many of my clients, interest only is a popular choice, however, I do feel that the current restrictions on accessing such mortgages are warranted given the potential issues it can cause if not used correctly.
The statistics are a result of lender’s collective change in policy over the past few years. Lending criteria does make a challenge of an interest-only mortgage enquiry. Maximum loan-to-value (LTV), minimum equity, salary thresholds and strict repayment vehicle conditions don’t make it easy. Yet despite their desire in recent years to reduce the number of interest-only loans and minimise their exposure in this area, the rates on offer at the moment are the biggest facilitator in the ability to switch all, or part of the loan, to a full capital and interest basis.
Not so many years ago a great number of cases involved this same strategy to overcome the impact of poorly performing endowment plans. At that time, however, rates of 5.5/6% were normal headline rates, even at 50 to 60% LTV. Over the last few years, with rates being historically low, it has in many cases lessened the impact of that switch. Take a £100,000 loan, on 5.5% payments on interest only would be approximately £458. On a 15-year term on a rate of 1.75% payments on capital and interest would be approximately £632. In comparison, if lenders were forcing these policy changes upon borrowers on rates of, for example, 5.5%, the payment in this example would be approximately £817, a somewhat more noticeable and potentially damaging increase.
I wouldn’t say clients were driving the change. They do however appreciate the reality of the situation. How many really entertain selling when the loan matures? It simply isn’t responsible to adopt a ‘worry about it later’ approach. As valued advisers we have a responsibility to challenge and inform clients about the most appropriate solutions, which would include a switch from interest only to full repayment where possible. That’s not to say that interest only wouldn’t be the better fit for some borrowers. It does and should have a place as a credible solution in certain circumstances.
The findings of the recent report by the Council of Mortgage Lenders did at first glance indicate that the interest-only problem was quickly reducing.
Further study of the report did however state that in 2015 the number of outstanding pure interest-only mortgages was still at the dizzying height of 1.7 million.
We have approximately 7% of our clients on interest-only loans and I feel that brokers are in a unique position to advise their clients on the best way forward. We have encouraged our clients to contact their lenders to see what can be done. I’ve found that the answers vary from one lender to another. One large lender told the client that the mortgage must be paid off by the mortgage end date or they will repossess. Another bank gave a client a five-year extension to the mortgage end date and this will enable our clients to plan for the future.
Whilst lenders have been proactive in contacting clients there does not seem to be a standard approach. Lenders do have a duty of care as they did allow interest-only loans and sometimes the endowment policies that were sold by them under performed.
Downsizing is not always the ideal solution for clients but equity release can help as deals become more competitive and flexible.
So lenders, let’s see a more consistent and imaginative approach and hopefully the next report will see a vast reduction in interest-only loans.