Julian Knight: Why home-buyers still need to have interest-only loans

Despite all those negative headlines, they still make sense for buy-to-lets and young hopefuls

Interest-only mortgages are bad, repayment loans are good. Shame they didn't tell us that a few years ago. Back in 2006, around a third of new mortgages were taken out on an interest-only basis. That was probably five or six times too many. Mis-selling is the only explaination, carried out by mortgage brokers and lenders alike.

At the time, lending decisions were being made in the blink of an eye and borrowers were egged on to borrow more and self-certify their income. It was crazy stuff and although we didn't quite have the same collapse through so-called Ninja loans – no income, no job – as in the US, here we were in fact storing up horrendous problems through interest-only. It is only now when these mortgage deals are coming to an end, borrowers nearing retirement and needing to move to another lender, that we are beginning to glimpse the consequences.

At the Independent on Sunday we have been warning about the time-bomb of interest-only for years. In fact, we have in the past dug through reports issued by the Financial Services Authority – the unsuccessful forerunner of the Financial Conduct Authority – to highlight just how many people are exposed by the mis-selling of interest-only.

It is good the FCA is now upping its game on this issue and a vast number of those on interest-only would be best taking steps now to ensure they aren't left with a major hangover of debt. If you have an interest-only mortgage, the first thingis to assess whether you would be best switching to a repayment deal. It is better to do that now rather than a few years as repayment mortgage rates are at all-time lows and I can't see them going much lower.

If switching isn't an option at the moment – perhaps because the cost of the loan is too high, your credit rating is poor or the house you bought hasn't increased in value – then you should be looking to pay spare cash into either a savings account or invest in a fund. This doesn't have to be a formal arrangement (paying into an individual savings account will suffice) but what it will do is build up a pot of money so you can either pay down some of the capital on the mortgage or use it to reduce the loan-to-value of the loan when looking to remortgage.

But in all the negative headlines on interest-only it shouldn't be forgotten that there is actually a place for this type of product. It does seem that sometimes regulators would like to see this interest-only consigned to the dustbin of history.

But they are wrong. If you want to be a buy-to-let purchaser then interest-only makes sense. If you are young and in a career where it is very likely that in time your income will increase dramatically – say a doctor or lawyer – then why not max out through an interest-only home loan to buy the best possible property when you know you will be able to afford it comfortably in a few years' time?

The chill winds blowing from regulators though has meant that many providers have turned their back on interest-only mortgages and, more generally, the hoops that people have to jump through at the moment are more difficult than ever. No one wants a return to the free for all of a few years ago but now we have potentially – and I know this is going to mean letters and angry emails – too few interest-only mortgages being taken out.

We are in danger of throwing the baby out with the bathwater. There is a small percentage of people for whom interest-only is appropriate and they should have a decent choice, as long as everyone knows the risks and the correct repayment vehicles are put in place.

Play fair on financial advice

Last week's comment on the need to take advice when buying an annuity has prompted lots of emails and calls. Most readers seem to agree it is best done with guidance but others pointed out that with the explosion in financial advice fees for many with sub-£50,000 pension pots, getting a helping hand with an annuity purchase is too costly. That's fair comment, and makes it even more important we have a fairer and more affordable system of financial advice.

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

i100 In this video, the late actor Leonard Nimoy explains how he decided to use the gesture for his character
Arts and Entertainment
Secrets of JK Rowling's Harry Potter workings have been revealed in a new bibliography
arts + ents
Down-to-earth: Winstone isn't one for considering his 'legacy'
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SThree: HR Benefits Manager

    £40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

    Recruitment Genius: Office Manager / Financial Services

    £30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

    Jemma Gent: Year End Accountant

    £250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

    Jemma Gent: Management Accountant

    £230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

    Day In a Page

    HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

    Scientists hail daily pill that protects against HIV infection

    Breakthrough in battle against global scourge – but will the NHS pay for it?
    How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

    Time to play God

    Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
    MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

    MacGyver returns, but with a difference

    Handyman hero of classic 1980s TV series to be recast as a woman
    Tunnel renaissance: Why cities are hiding roads down in the ground

    Tunnel renaissance

    Why cities are hiding roads underground
    'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

    Boys to men

    The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
    Crufts 2015: Should foreign dogs be allowed to compete?

    Crufts 2015

    Should foreign dogs be allowed to compete?
    10 best projectors

    How to make your home cinema more cinematic: 10 best projectors

    Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
    Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

    Manchester City vs Barcelona player ratings

    Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
    Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

    Monaco: the making of Wenger

    Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
    Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

    Chris Gayle: The West Indies' enigma

    Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
    In Ukraine a dark world of hybrid warfare and murky loyalties prevails

    In Ukraine a dark world of hybrid warfare

    This war in the shadows has been going on since the fall of Mr Yanukovych
    'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

    Homage or plagiarism?

    'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
    Broadchurch ends as damp squib not even David Tennant can revive

    A damp squib not even David Tennant can revive

    Broadchurch, Series 2 finale, review
    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

    Inside the mansion of Germany's 'Bishop of Bling'

    A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower