FSA should realise interest-only can be right for some

20 September 2010

If things carry on the way they are going, it is conceivable that interest-only mortgages will vanish.

So says the Council of Mortgage Lenders, which is concerned that the Financial Services Authority’s plan to make lenders monitor the ability of borrowers to find a suitable plan to repay the capital will push up costs and deter lenders from offering interest-only mortgages in the first place.

Lenders are already cracking down on interest-only loans. They have either been withdrawing cutting back on acceptable methods of repaying the capital.

Relying on bonuses, selling the property or using an inheritance to pay off the capital are no longer reasonable repayment vehicles, according to some lenders.

This crackdown also has an impact on those remortgaging, especially those with less than 25% equity in their homes.

Santander recently announced that interest-only borrowers trying to remortgage would have to move on to a repayment deal or revert to its SVR.

This may be bearable while interest rates are low - Santander’s SVR is 4.24% - but less attractive once rates start rising.

Other lenders will force interest-only borrowers to take any portion of the loan above 75% LTV on a repayment basis.

It is already harder to get an interest-only mortgage. If they totally disappear there will be less choice for consumers. How can that be a good thing?

If interest-only loans totally disappear there will be less choice for consumers. How can that be a good thing?

Yet interest-only loans aren’t necessarily bad. For first-time buyers on a limited income, an interest-only loan might be their only way of getting on to the housing ladder.

We can tut-tut and say they should wait until they have saved up enough to afford a repayment loan but the average deposit put down by a first-time buyer is now £34,000. How much longer will they have to wait to buy a property?

And what about those first-time buyers who don’t have a repayment vehicle but are due to come into an inheritance in a few years that would easily clear the capital? Or those on low incomes now but who won’t always be?

Take barristers, for example. They earn modest incomes initially but are likely to earn a lot more as their career progresses. Should they be denied a mortgage until they were in that position?

It is no secret that wealthy borrowers prefer interest-only deals.

With relatively low basic incomes but sizable and regular bonuses, it might not make financial sense to opt for a 25-year term on a capital andinterest basis.

A self-employed trader earning around £1m a year and taking out a £2m loan is far more likely to want to repay the loan in five years from their income, not 25. In this instance, an interest-only mortgage makes sense.

We’re back to the ’one size fits all’ debate. When it comes to mortgages, it really doesn’t. For some people, interest-only is the right choice and the FSA shouldn’t have a problem with that.

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