Pricing for risk puts brokers centre stage

14 June 2010

While there is little evidence of interest-only loans performing badly concerns persist that they are a risk to lenders and borrowers.

For borrowers, these loans could be the next mis-selling scandal. Unable to pay back the loan at the end of its term, they may claim not to have understood what they were sold.

Many people for whom interest-only was the right starting point may not have understood the long-term costs and still be on deals with no repayment plan.

While wholesale credit markets remain difficult lenders want volume quality business for funding purposes. The gradual tightening of interest-only lending is an example of them limiting their exposure to possible bad debt.

So this is not the end of interest-only products but rather a move towards pricing for risk. Brokers must show more understanding of repayment vehicles such as ISAs, deposit accounts and investments.

Lenders won’t want to price themselves out of the market, while regulators and policy-makers have no interest in disenfranchising potential home owners.

So we will see products to replace interest-only mortgages in due course that price for risk.

Also, expect more mortgages that start as interest-only and then switch to higher monthly capital repayments, although this would mean no switch fee. In future, advisers will be even more crucial to getting the right deals.

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