Home hopes of the young and self-employed will be dashed if interest-only mortgages go
Plans by the Financial Services Authority to clear up credit crunch threaten a route to home ownership. Chiara Cavaglieri and Julian Knight report
Sunday 17 October 2010
The clock may be ticking for interest-only mortgages.
The once highly popular product, which accounted for a third of all new home loans in 2007, is at risk of being killed off. The Financial Services Authority (FSA), as part of its credit crunch clear-up, has said it would like to see firms tighten dramatically their criteria for making the type of loan which allows borrowers to only pay the interest rather than make capital repayments.
Now the trade body, the Intermediary Mortgage Lenders Association (IMLA), is warning that hundreds of thousands of would-be house buyers from self-employed through to young first-time buyers could frozen forever out of the property market.
Peter Williams, IMLA's executive chairman, said: "If the FSA brings in tight controls, it could alter how easily people can enter the market. For example, a young graduate who may be on an incremental pay scale could miss out even though a lender might have offered them an interest-only loan, knowing that they will over time be able to make capital repayments."
Additionally, lenders would have to make annual checks to ensure that borrowers have suitable repayment plans in place. IMLA has said that this will only serve to put lenders off.
"On the face of it these checks sound sensible, but if, as a lender, I confirm your case, you could effectively be relying on my guarantee. Rather than simply checking, the lender is seen to have sanctioned the investment strategy that underlies the loan," said Mr Williams.
Although unsuitable for many borrowers, an interest-only mortgage's attraction is that the initial monthly payments are much lower because only the interest is cleared, not the capital as with a repayment mortgage. When paying off a £150,000 loan over 25 years, an interest rate of 4 per cent would cost £792 per month for capital repayment borrowers but only £500 per month on an interest-only deal.
Brian Murphy, head of lending from the Mortgage Advice Bureau, said: "Unfortunately, as circumstances change personally and in the market, these best-laid plans, although made in good faith, sometimes come apart."
Relying on house price rises to cover the debt is a particularly risky strategy as many first-time buyers who bought at the height of the boom are finding too their cost.
Melanie Bien, from mortgage broker Private Finance, said: "The FSA wants to protect vulnerable borrowers and is concerned that first-time buyers are opting for interest-only mortgages with no thought as to how to pay back the capital because the payments are cheaper than a repayment mortgage."
Lenders, however, are already moving away from the market to a certain extent. In July of this year interest-only mortgages accounted for only 17 per cent of house purchases, a far cry from the figures during boom time. "The market is already stifled and there is less consumer choice. A blanket ban on interest-only does the housing and mortgage markets no favours at all," said Ms Bien.
If, as IMLA suggests, the clampdown by the FSA does see the end of these loans, many responsible borrowers stand to suffer loss.
An example would be high earners who may be on relatively modest income but receive big bonuses and use lump sums to clear large chunks of their mortgages when they are able to do so. Another would be self-employed homeowners who need a mortgage that fits their fluctuating income.
Having no interest-only mortgages will also mean that many landlords suffer who would normally be safe from the typical risks associated with these loans. That is because the property isn't actually their home and they can offset mortgage payments against income when settling their tax affairs.
The real challenge for the FSA, therefore, is to retain interest-only products as an option for suitable borrowers while still protecting their ability to maintain their mortgage in an erratic market.
"While it is easy to understand why the FSA wants to take a watching brief on interest-only mortgages, for the regulator to have a one-size-fits-all approach is not helping either borrowers or lenders and over-regulation could potentially have a detrimental impact on the wider housing market," said Mr Murphy.
Melanie Bien, Private Finance
"Interest-only mortgages suit some borrowers and if they disappeared completely it would significantly reduce consumer choice. One size doesn't fit all when it comes to mortgages, and interest-only is the right option for a certain type of borrower who understands the risks and has thought about how they are going to repay the capital at the end of the mortgage term."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
Children's bookseller wins The Independent's new author search
Board creates magnetic field to achieve lift
- 1 Salisbury ranked seventh-best city in the world to visit in Lonely Planet’s Best in Travel 2015
- 2 Disney announces new female-led film Moana
- 3 Banksy arrest hoax: Internet duped by fake online report claiming artist's identity has been revealed
- 4 Kentucky gang rape: 15-year-old boy left in critical condition after sexual attack by group at party
- 5 Russell Brand threatened with arrest after filming outside Fox News headquarters
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Residents should throw a street party and mix with immigrant neighbours, councils told
Russell Brand threatened with arrest after filming outside Fox News headquarters
London bus driver 'kicks gay couple off for kissing'
Jose Manuel Barroso warns David Cameron against making 'historic mistake' over immigration reforms
Worst Airports of 2014: Poll names Islamabad airport in Pakistan worst in the world
iJobs Money & Business
£23000 per annum + pension and 22 days holiday: Ashdown Group: An established ...
£27000 per annum + pension, 22 days holiday: Ashdown Group: An established ind...
£23000 - £26000 Per Annum: Clearwater People Solutions Ltd: Our client is curr...
£25 - 30k: Guru Careers: A Corporate Actions Administrator / Operations Admini...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village