Repayment popularity driven by borrowers
The sales director at Brentchase Financial said: “Some of it must be because lenders have tightened their criteria but I also think people are fed up with having so much debt hanging around – new borrowers and people remortgaging are going for shorter term mortgages to cut the amount of interest they’re paying.”
The CML research showed the proportion of people taking repayment rather than interest-only mortgages in October last year hit a five-year high. There was a particularly strong shift for first time buyers with 93% of this group opting for a repayment mortgage – the highest proportion since records began in 1974.
“We’re seeing exactly the shift the CML numbers indicate,” said Fitzgerald. “If you go back five years a lot of people did interest-only with an investment alongside to help them repay. But the idea now is getting rid of the mortgage – clients always ask how much they can pay off without being hit by early repayment charges in the penalty period.”
Fitzgerald also said borrowers he sees are also swaying towards taking repayment mortgages over a shorter term with clients asking for quotes for 20 years as opposed to 25 years.
In July 2010 the Financial Services Authority’s Mortgage Market Review consultation paper on responsible lending asked for industry feedback on whether interest-only mortgages should have a future. The FSA also said affordability for interest-only mortgages should be assessed on a repayment basis.
Explaining the move towards repayment mortgages a CML spokesman said: “House prices are not strong and in most cases it’s better for lenders and borrowers either to borrow more cautiously or repay capital on the mortgage. But it also reflects the regulatory environment we’re in. It may be that lenders are moving away from offering interest-only in anticipation of a rule change – though it’s not clear whether interest-only will be scrapped or not as yet.”
Paul Diggle, property economist at research house Capital Economics, said the move lenders were making towards repayment mortgages should be welcomed.
He said: “There appears to be a growing recognition amongst lenders that, by and large, repayment mortgages are in the best interests of most borrowers. If this is the case and if it continues to be the attitude lenders take even after their ability to lend recovers, then it is a welcome development. It is certainly a view that we share.”
Diggle said the high level of interest-only lending during the boom years contributed to the unsustainable gap that opened up between house prices and earnings. He said it also left a vast number of borrowers dependent on ever-rising house prices to clear their debts.
“The shift away from interest-only mortgages will bring some short-term pain,” added Diggle. “It presents yet another hurdle to first time buyers trying to get a foot on the housing ladder by further reducing their purchasing power.
“But ultimately, the shift towards repayment mortgages may help to close the gap between house prices and earnings, and therefore marks an important step towards a more sustainable mortgage market.”