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
Saturday 04 May 2013
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.
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