Interest only hasn’t become less interesting
John Phillips is financial services director at Kinleigh Folkard & Hayward
With all the positive market news adorning our media, you might be forgiven for thinking that the interest only time-bomb had been diffused. It hasn’t of course but it does represent a huge opportunity for brokers to add real value to the UK’s home-owning public.
Let’s not forget the scale of the issue. Estimates suggest there are between 2.5 million and four million interest-only mortgages, with around 150,000 maturing annually. Half of these face a shortfall of about £71,000, while one in 10 of all interest-only borrowers had no repayment plan in place.
The FCA has said more than 2.6 million interest-only mortgages will be due for repayment over the next 30 years, and one in 10 people on these deals had no repayment plan.
We should also remember lenders do not have a clue what to do about it. While the FCA may instruct banks to treat interest-only customers fairly – and “not unfairly charge them a higher rate of interest than other customers” if they are unable to leave, the reaction of most has been to adopt a hard-line approach to interest-only that has little no logic to it. Interest-only can be an appropriate mortgage structure for some people, but lenders are making blanket decisions that fail to account for each customer’s personal circumstances.”
Many such as Nationwide, Royal Bank of Scotland and Coventry have fled the scene and those that remain have demanded that borrowers have at least 50% equity in the property.
This has only exacerbated the problem. Many interest-only borrowers have found they are unable to refinance at the end of their terms, with lenders also tightening affordability criteria.
The Clydesdale and Yorkshire bank have offered something of a lifeline to some with a product released earlier in the year but this is the exception not the rule.
So the broker’s role will be critical, not just because of the options available, but because, in a complex area, good advice can save people thousands of pounds. For example, solutions may include part overpayment strategies, that will increase equity making it easier to remortgage. It may mean negotiating with lenders on behalf of clients as a good broker can consider options that will significantly strengthen their position. Understanding the client’s whole financial picture will become increasingly important but in terms of adding real value and cementing client relationships, this may be a golden opportunity.