Interest-only would work for first-time buyers
Richard Adams is managing director of Stonebridge Group
When it comes to interest-only mortgages it seems that our industry is in something of a dilemma.
Fuelled by a highly suspicious regulator, and the MMR focus on affordability, in other times the days of the interest-only mortgage might be numbered, were it not for a number of factors in its favour.
For a start, as the recent UK Finance figures revealed, there are approximately 1.7 million interest-only mortgages outstanding in the UK, totalling £250bn, and while their number has dropped considerably – down by 46% over the last six years – that (by anyone’s estimate) is a lot of mortgages and a lot of debt.
Of course, one can understand why the regulator is not overly enamoured with interest-only loans, especially when you consider that a significant number of borrowers have no repayment vehicle running alongside them, in order to pay the capital at the end of the term.
The growth in the later life lending/equity release sectors is down, in no small part, to the fact that large numbers of borrowers are reaching the end of their mortgages with either no, or not enough, money put aside in order to pay off the capital.
Hence, we have a significant increase in the number of ‘interest-only mortgage solutions’ for those in this predicament – we have seen maximum ages rise for onward loans, while lenders with these borrowers on their books have been bending over backwards to move customers onto further mortgages, or in a growing number of cases, advisers are finding equity release solutions to the problem.
Part of me however looks at the interest-only mortgage and sees a decent option for the right customer – I’m not one of those who believe that interest-only should somehow be phased out because, there are a number of borrowers, who might still benefit from such products.
Of course, the buy-to-let sector is built upon interest-only loans, for tax relief reasons, but there are also clients within the residential space who would still be suitable.
It’s often been said in the past that if we want to see more first-time buyers purchasing then actually an interest-only mortgage at the start might help this along.
First-timers would clearly benefit from the initial lower monthly mortgage costs, and they would still need to put down the deposit in order to get this and go through the necessary affordability checks.
However, in those early years of a mortgage, having the flexibility to go for interest-only and pay that lower amount, might establish the firm foundations for these purchasers to go on and switch to a repayment mortgage in the future.
I know that Ray Boulger has long been an advocate of interest-only mortgages for first-time buyers and I tend to agree, perhaps with the added caveat that at the time such a loan is taken out, the lender could also set out a clear pathway to repayment, which would hopefully satisfy any risk and regulatory concerns.
Clearly, the need for an adequate repayment vehicle to run alongside the interest-only loan would be key, but perhaps might not be so important if the first-time buyer, for example, has to move to a repayment loan in a certain number of years. Again, lenders might be able to offer these loans and ensure that the borrowers are certain about their responsibilities and that this should not be viewed as a permanent arrangement.
Taking that early interest-only option can give a borrower time to establish themselves in a first home, plus there is a good chance they will move up the career ladder, and that the value of their home might also increase.
We should also not forget that first-timers tend not to stay in their ‘starter homes’ all their lives, so there is the potential to move them to a repayment either at their next remortgage or at the time they look to move. Admittedly, recent figures suggest that we are moving less and less after the initial purchase, so perhaps the remortgage option is a better one rather than waiting for a move.
All in all, it’s obvious that we had too many people on interest-only mortgages with no repayment vehicle in place, and it’s positive that their number is coming down.
However, we should not throw the baby out with the bath water when it comes to interest-only – not only are they a perfectly feasible product solution for many borrowers, given the government’s focus on getting more first-time buyers onto the housing ladder, they could perhaps be looked at to help a borrower demographic that, with the right checks and balances in place, could benefit significantly from them.