Underwriting can sort interest-only wheat from chaff
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Interest-only should be allowed subject to the deal making sense to the lender.
To impose a blanket ban or set rigid criteria is a step too far, although inheritance should not be allowed as a repayment vehicle.
What if the borrower dies before their parents without adequate life insurance, or the parents die unexpectedly with a mortgage of their own requiring repayment?
So what is a valid vehicle?
As we have seen in the past, endowments are not a guaranteed way to repay. Sale of the property is one way provided it is plausible for it to be sold on the first day, leaving sufficient equity to purchase a suitable smaller property.
For example, a four-bedroom detached house could be sold leaving enough for a one-bedroom flat. Clients looking to buy a four-bedroom detached property would most likely have children at home and could expect to sell in 25 years time and move to a flat.
Interest-only became acceptable to lenders without proper evaluation of repayment vehicles as loans were sold on and became somebody else’s problem.
Interest-only is a great way for home owners to start out, particularly those with a career progression mapped out such as doctors, accountants and solicitors.
It works just as well for first-time buyers on a tight budget, provided the issue of a suitable repayment plan is addressed early.
So once again a lender takes a sledgehammer to crack a nut.
The answer is simple - proper underwriters are required with interest-only cases.
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