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Sarah Davidson Friday, 27 April 2012
 

Sarah Davidson

Interest-only is a personal investment

Here’s a question: why are interest-only mortgages so bad for someone living in a house when you could compare it to a buy-to-let loan with a long term tenant?

 

Answer? It occurs to me that the whole interest-only debate is rather more political than it seems.

 

The Mortgage Market Review has clamped down on interest-only mortgages for consumers and whether or not the Financial Services Authority intended it, lenders have pre-emptively tightened the screws on the product.

 

Criteria are now so restricted that it’s virtually not available.

 

While in theory assessing any interest-only application on a capital repayment basis makes good sense it precludes the opportunity to use your primary residence as an investment.

 

It “protects” some consumers from over-stretching themselves yet it also prevents some more financially savvy consumers from choosing to take a risk for a reward.

 

In the past week I’ve heard several people refer to the authorities’ desire to return to a housing market that is about “nesting not investing”.

 

Homeownership instead of access to the housing market.

 

In other words consumers can no longer choose to take a punt on house prices with their own home.

 

While this shift might have the effect of curbing house price booms the real driving factor behind the housing market overheating is a lack of supply.

 

To use that as an excuse to prevent many people’s dreams of improving their financial circumstances is convenient.

 

It is also the philosophical argument of survival of the majority at the expense of the few.

 

It is inherently a left wing philosophy. It affords people the freedom to do a lot of things but takes away the freedom from inhibitors that prevent them doing as they personally see fit.

 

In a “free” society that encourages entrepreneurialism it is an unusual stance to take.

 

It also seems ridiculous to suggest that interest-only loans are not good business for the mortgage lender.

 

My logic may be flawed but it seems to me that an interest-only buy-to-let loan is given at a slightly higher rate than a residential loan and assessed on a rental income ratio.

 

If a consumer chooses to be his own tenant surely the risk of void periods and damage to the property is less than with some random tenant with a tenure of six months?

 

If his income is assessed and it covers the payments why can’t he be his own tenant and treat his home as an investment?

 

Risk is clearly a commercial factor and lenders should be able to protect themselves by charging a more commercial rate to consumers who choose to take this risk.

 

I heard one interesting suggestion from the head of lending of one large mortgage lender earlier this week.

 

Why not have two tiers of regulatory consumer protection? If you are worried you’ll be taken advantage of then sign up to full protection.

 

If you want to use your savings to access the housing market and invest while you nest then sign up to less comprehensive protection.

 

As it stands interest-only mortgages look likely to be a legacy product only.

 

For a society that prides itself on aspiration, that would be a shame.


 
 

Comments

c. macdonald wrote:

I think there is a genuine place for Interest Only mortgages and my own personal take on it are that lenders want to see more money coming over the counter, because, ultimately that is all that will happen. My own personal mortgage is on interest only and to repay my lender I intend to sell my house, take the equity and purchase a shared ownership property. With one eye on the future, whilst I acknowledge I will pay rent, if anything happens to me healthwise there will be insufficient equity for the council to put an all monies charge on my property to pay for mine or my partners care. Whilst still hopefully at 65 fit enough to enjoy the remaining equity, with sufficient holidays to make my halcyon years and enjoyable and fun.

Monday, 30 April 2012 12:51 GMT

Cath Hearnden wrote:

Residential mortgages are a tool to buy a home not an investment and lenders are starting to realise that.  The problem when people "take a punt" on the price of their home making them some money is that when it doesn't they forget they made an "informed” decision and the industry pays for its "recklessness".

Unfortunately memories are short (or bloggers are young) and have forgotten times of negative equity.  

In this time of consumer protection and provider/adviser blame culture lenders are at last remembering the distinction between commercial lending and HOME owner loans.

Tuesday, 08 May 2012 10:26 GMT

Jane Doe wrote:

Of course they are different. Retire, sell a buy to let and take any equity to spend during retirement.  But if there is no equity no effect on your living arrangements. Sell your house to repay the mortgage.....homeless if no equity. Duh!

Some peopkle will be fine with interest only if there are other means to repay the capital or a pension to fund the mortgage interest through retirement, but they are the minority and it is a dangerous ploy to disregard the change in circumstances at retirement and spend all the money whilst earning.

Wednesday, 13 June 2012 07:57 GMT

Mary Lockyer wrote:

Simply because they will probably have no means to redeem the loan at the end of term and run the risk of negative equity too, they will have no option other than downsizing and no one can forecast market conditions for selling that far ahead.

Wednesday, 13 June 2012 09:20 GMT

Shaun Vickery wrote:

Actually guys, I'm with Sarah on this to a great extent. What happened to TCF principles when it applies to someone with a perfectly valid and already established repayment plan for an interest only mortgage? And even comparing interest only, with a plan to sell the residential property, against renting for the next 25 years, might not be so outrageous. The outcome could be considered essentially the same. I know it's not that straight forwards but therein lays the real point. Broad brush rules don't often mean good individual advice, and nor does over-reactive legislation or policy. Customers need choice and Advisers must be able to advise, as long as everyone is crystal clear on the plan.

Thursday, 19 July 2012 10:51 GMT

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Tuesday, 22 January 2013 14:15 GMT