Money Insider: 'Interest only' sheds pariah status as mortgages revive
Friday 23 August 2013
There has been overwhelming evidence this week that the mortgage market has woken from its long slumber and is once again open for business.
It has been reported that monthly mortgage lending is at its strongest for almost five years, and that there are over 30 per cent more mortgages to choose from than there were this time last year. To cap it all, we've even seen the emergence of new interest-only products.
As the economy slowly edges its way out of the doldrums, lenders, also buoyed by cheaper funding costs, have rediscovered their appetite for lending.
The latest statistics from the Council of Mortgage Lenders (CML) highlighted just how much busier mortgage lenders and brokers have been in 2013, with an estimated £16.6bn advanced in July alone, up 29 per cent on the numbers 12 months ago. Meanwhile, the Mortgage Advice Bureau (MAB) reported that borrowers now have more than 10,000 products to choose from, up from 7,700 one year ago and a low point of around 3,400 back in the gloomy days of July 2009.
As well as increased choice, the MAB said interest rates on both two-year and five-year fixed-rate home loans had fallen by an average of more than 1 per cent in the last 12 months.
There's plenty of competition in the market for new mortgage business, with sub-2 per cent rates for two-year fixes now coming thick and fast. The latest such deal comes from Chelsea Building Society at 1.99 per cent for two years on loans of up to 75 per cent, but as with all these low rates, don't forget to factor in the impact of the associated product fee, in this case £1,545. If you're in any doubt as to which is the best mortgage for your circumstances, speak to a local independent adviser.
Another sign that the market is on the mend is product innovation. A few weeks back I looked at the pros and cons of Leeds Building Society's 0 per cent mortgage offer, and now Clydesdale and Yorkshire banks have launched a new interest-only deal. This has been a no-go area in the past few years, with many lenders tightening their stance on this type of loan and greedy claims companies trying to turn it into the next PPI scandal.
It was therefore a surprise when Clydesdale and Yorkshire, both part of the National Australia Bank group, announced details of their new "Low Start" mortgage range, where you only make interest payments for the first three years of your loan.
The low-repayments option will be attractive to people needing to fund home improvements on their new property.
The banks are keen to stress that affordability checks at the application stage are robust and ensure that borrowers will ultimately be able to manage both the capital and interest repayments – and that's vital if they want to prevent potential repayment problems further down the line.
If you borrow £150,000 on one of these low-start mortgages (25 years), at 3.19 per cent up to 75 per cent loan-to-value (LTV), here's how the numbers stack up. Normal capital and interest payments would cost you £727 per month, but the interest-only option cuts your outlay to just £399 – saving £328 per month initially.
However, after three years your balance will still be £150,000. If you repay this over the remaining 22 years, assuming you can still get 3.19 per cent, then monthly payments will rise sharply to £792.
There are cheaper deals out there, such as Yorkshire Building Society's 2.34 per cent three-year fix on LTVs of up to 75 per cent, although this doesn't offer the flexibility of low initial payments.
There's nothing wrong with interest only as long as the costs and repayments are explained clearly and borrowers have the ability to make the full repayments when they kick in.
Andrew Hagger is an independent personal finance analyst from moneycomms.co.uk
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