Time is running out for interest-only mortgages
Millions will be held captive as lenders withdraw, reports Chiara Cavaglieri
Sunday 25 March 2012
Interest-only mortgages look to be on their way out after Coventry became the latest lender to tighten up its lending criteria. Along with Nationwide, Coventry announced this week that it would reduce its maximum loan to value to 50 per cent. If interest-only deals disappear altogether, many fear that thousands of borrowers could become mortgage prisoners, unable to remortgage or pay off their debt.
Martin Wheatley, a director of the Financial Services Authority (FSA), has spoken of his concern over the "ticking time-bomb" of 1.5 million mortgages, worth a colossal £120bn, which will come to an end over the next 10 years. The FSA says 80 per cent of these have no repayment strategy in place, and with lenders clamping down, many of these borrowers, now approaching retirement, could be forced to sell their homes.
Interest-only mortgages are certainly in a sorry state today; the lenders that haven't abandoned ship altogether are still clearly nervy about their exposure and when one acts, the others are sure to follow. It was only last month that Santander reduced its lending for interest-only to 50 per cent LTV, and both Nationwide and Coventry have reacted quickly.
"This is another nail in the coffin of interest-only," says Andrew Montlake from independent mortgage broker Coreco. "Lenders that have remained in the space up to 75 per cent have pretty much been forced into this move. No one can afford to be the last man standing with a share that is too heavily biased towards interest-only."
Anyone hoping to take out an interest-only mortgage now will have a tough time convincing lenders and will find it tricky to meet the increasingly strict criteria; Lloyds Banking Group recently said it would no longer accept cash savings (including ISAs) as a repayment vehicle. Experts say there is no room for complacency and that if your lender has not tightened its policy on interest-only yet, it is only a matter of time.
While much of the attention to interest-only mortgages has generally painted them in a bad light, many believe that lenders are now overreacting and would be better off looking at individual cases instead of making across-the-board changes which will eventually sound the death knell.
"Interest-only is not necessarily reckless, as long as the borrower has a sensible and achievable repayment strategy in place," says Mark Harris, the chief executive of the mortgage broker SPF Private Clients. "For those on relatively modest incomes who are guaranteed to earn more at a later date – such as barristers, doctors etc – it might make sense to start off with interest-only as a way of getting on the housing ladder."
Lenders may be running scared now, but they were more than happy to lend during boom times – Council of Mortgage Lenders (CML) figures show that interest-only mortgages accounted for 33 per cent of all mortgages taken out in 2007. They had obvious appeal; you could secure a mortgage with lower monthly payments because you were covering only the interest, and at the end of the mortgage term, you could use your repayment vehicle (endowment policies were sold alongside them) to clear the capital debt.
However, the cracks began to show when lenders stopped ensuring that borrowers were making sufficient payments into these vehicles and instead, were happy to let homeowners take a punt on rising house prices to pay off the capital. Anyone who took out an interest-only mortgage in the lead up to the crash in 2008 did so at a time when people were borrowing sums well beyond their means.
Many of these borrowers could now be hanging on by a thread, kept afloat because rates are low, but extremely vulnerable if and when standard variable rates (SVRs) rise.
Mr Montlake says: "We could see a big problem emerging over the next one to three years if and when rates do start to rise on lenders' variable rates. A lot of people are only surviving because rates are low. Lenders should be doing a lot more to protect them by offering realistically-priced fixed rates."
So is the demise of this type of mortgage really bad news? You can't get away from the fact that interest-only loans are a more expensive way to buy property. Monthly repayments may be smaller but these deals can be far more expensive over the long term because the capital debt remains the same; the lender charges you interest on the entire loan throughout the 25 years, while with a repayment mortgage your debt shrinks over time so that each month the interest payable gets smaller. For first-time buyers it may be more sensible to stick with a repayment deal and reduce the monthly payments by extending the term of the mortgage to, say, 35 years, from the usual 25.
If you have an interest-only loan now and can afford to switch to a repayment mortgage, it could be a good move. While rates are low it makes sense to try to pay off as much of your mortgage as you can, and if lenders are backing away from the interest-only market, those who can afford to may decide they need to do the same. If you will be hit with early repayment charges you may be able to switch at least part of your debt to repayment so that you are at least paying off some capital.
Jason Witcombe, from Evolve Financial Planning, says even with the best of intentions, it is easy to keep putting off paying down a chunk of capital, whereas a repayment mortgage enforces that discipline.
"The problem is that interest-only mortgages have been abused in the past as a way of making property purchase feel affordable. It therefore doesn't surprise me at all that lenders want to be picky about who they offer such terms to," he says.
"If it stops people taking out mortgages that they will never be able to pay back, then Nationwide and Coventry's move is a positive one."
Expert view: Mark Harris, SPF Private Clients
"Wouldn't it be great if individual banks could make individual decisions rather than acting like sheep?
"These moves by Nationwide, Santander, Lloyds and Coventry Building Society are hugely disappointing but no surprise – it's like a pack of cards: once one lender tightens its interest-only policy, the others inevitably follow because otherwise they are inundated with business and end up with an unbalanced lending book."
Independent Partners: Get fee-free expert mortgage advice and find the right mortgage deal for you.
elephant appealThe first 23 lots in our charity auction have now gone. But there are 22 more still up for grabs
The magicians using online collaboration to push boundaries
lifeIt takes year-long dedication to get Selfridges ready for 25 December. And they're already working on plans for 2015...
Jennifer Lawrence attacks mass media again over body image
- 1 America's 'virgin births'? One in 200 mothers 'became pregnant without having sex'
- 2 Sun will 'flip upside down' within weeks, says Nasa
- 3 Ian Watkins: Paedophile Lostprophets singer sentenced to 35 years for child sex offences, as judge labels him a 'dangerous sexual predator'
- 4 Christmas comes early: Justin Bieber announces he's 'retiring from music'
- 5 Children evacuated from swimming pool after prosthetic leg mistaken for paedophile
Exclusive: Young people ‘want UK to stay in Europe’: Four in 10 adults aged 18 to 24 are ‘firmly in favour’ of membership, poll shows
You can STILL be jailed for being a republican, government confirms, and it remains illegal to even 'imagine' overthrowing the Queen
Kiss and yell: Italian protester charged with sexual assault after kissing riot police officer
Fighting back: the woman giving a voice (and 49,999 others) to the victims of sexism - by giving an airing to their horror stories
PM denies two child limit for benefits is part of Tory welfare policy
Ethan Couch: Texas quadruple murderer – or a victim of ‘affluenza’?
- < Previous
- Next >
iJobs Money & Business
£25000 - £32000 per annum: Harrington Starr: Junior Business Analyst - Banking...
£25000 - £35000 per annum + benefits + bonus: Harrington Starr: Business Analy...
£50000 - £75000 per annum + benefits + bonus: Harrington Starr: Implementation...
£50000 - £60000 per annum + BONUS + BENEFITS: Harrington Starr: A leading prov...
Day In a Page
A two-bedroom flat with an open plan kitchen and two balconies, close to Arsenal station
A six-bedroom farm house with separate, detached cottages and 371 acres of land
A two-bedroom cottage with parquet floors, chunky beams and an open fireplace
A Grade II-listed home with six bedrooms, secluded landscaped gardens and views across Hadley Green
A Grade II-listed mansion with two apartments and a cottage, near Gretna Green
A three-bedroom Grade II-listed mews house with vaulted ceilings and roof garden
A spacious Grade II-listed family home with annexe and equestrian facilities among four acres of land in Itchingfield
A four-bedroom home with exposed brick walls and open fires in the picturesque village of Northill
A Grade II-listed property with five bedrooms and unique tower, overlooking Hastings Old Town
A charming five-bedroom detached family home, set within half an acre in Kew
A two-bedroom maisonette set on the top two floors of a period building, close to Kentish Town Tube.
Take advantage of the extra space provided by former stables and outbuildings at this five-bedroom farmhouse.
This three-bedroom Victorian terrace is near to Queen’s Road Peckham station, Nunhead station.
A five-bedroom modern house with terrace, swimming pool, Zen treehouse and large carp pond
An unexpected gem with four bedrooms, remarkable vaulted reception and a galleried study area
A five-bedroom house in one of Lymington's most sought after tree lined avenues, moments from the marinas and sailing clubs
A grand early 19th century B&B close to the historic harbour, with four en suite bedrooms
A four-bedroom, 17th century home with walled gardens, a landscaped terrace, cellar and open fires
A six-bedroom house with five bathrooms and four reception rooms spread over 4,000sq ft of luxury living space
A stunning three double-bedroom apartment with two decked terraces in the exclusive gated community, Bromyard House
A 10-bedroom period, family home amid beautiful surroundings in the centre of the Wentworth Estate in Longcross village
A stylish three-bedroom apartment with two bathrooms and private landscaped garden, moments from Fitzroy Square
A Grade II-listed Elizabethan barn with landscaped gardens, exposed elm beams and four bedrooms, all with lovely views
A six-bedroom family home, dating back to 1280 with four reception rooms, barn, swimming pool and tennis courts in Harwell
A spacious two-bedroom flat, refurbished to a very high standard with private landscaped garden, close to Kentish Town station
An exceptional two-bedroom apartment with balcony and underground parking in the centre of Richmond
A one-bedroom, luxury, duplex apartment in the grand landmark building, Imperial Hall
Run a fabulous boutique shop, live above it in a one-bedroom flat and let a second one-bedroom flat that comes part and parcel
A Grade-II listed, thatched cottage in Hundleby village, with five bedrooms, a coach house and three and a half acres
A spacious two-bedroom flat in the heart of Hoxton Square with wooden floors and roof terrace
A five-bedroom family home with stunning pool and gym complex set among two acres of land
A six-bedroom period house with heated swimming pool and a separate two-bedroom annexe cottage in Townlake, £795,000
A spacious and contemporary two-bedroom flat arranged over three floors, with garden patio close to St George Square, £600,000
A one-bedroom flat in a beautiful Regency building opposite the beach in Kemp Town, £190,000
A two-bedroom flat with London skyline views close to Surrey Quays. £395,000.
A seven-storey tower with three bedrooms and a stunning roof terrace. Guide price: £850,000.
A 16-bedroom country pile with nine reception rooms, four self-contained flats and a 13th century Peel Tower. £850,000.
A classic six-bedroom Victorian Manse house 10 miles from Edinburgh. £495,000.
John Lennon's childhood home in Liverpool to be sold at auction. Guide price: £150,000-£250,000.