You’ll no doubt have noticed that we recently conducted a review of interest-only lending across our Halifax and Cheltenham & Gloucester brands.
I thought it might be useful to give you a bit of background on this. First, it’s fair to say that we’ve had little experience of interest-only borrowers being unable to repay their capital at the end of their terms. But it’s also right that we should do what we can to keep it that way.
Interest-only has grown in popularity significantly. That does not mean it’s a greater risk but it does mean it’s time to review it. We have to ensure our products reflect the additional responsibility of interest-only mortgages both to borrowers and lenders.
Back in March we started to introduce tailored pricing for interest-only deals in Halifax Intermediaries.
The fact is that interest-only mortgages cannot guarantee that borrowers will be in a position to repay the capital when they come to the end of their term. By tailoring our pricing we are reflecting that inherent risk.
This pricing approach was the first outcome of our review and we’re now starting to explain what else is coming up.
We announced last week that large loans will only be available on a repayment basis going forward. Taking out a loan above £500,000 is a significant commitment and it stands to reason that any potential shortfall could be substantial.
Allowing this amount of borrowing on a repayment basis is the only way we can provide protection both to borrowers and the lenders involved that the capital amount will be repaid at the end of the term.
We know brokers understand the additional risk but to protect borrowers and ourselves it’s not only our products we have to review, we also have to look at our processes. Acceptable repayment vehicles are at the heart of this.
Interest-only is not there so people can benefit from low monthly repayments and sell at the end of the term
Let’s start with what should be obvious. Selling the home on which borrowers have a mortgage is not an appropriate repayment vehicle. Interest-only is not there so people can benefit from reduced monthly repayments and then sell at the end of the term.
Repayment vehicles should provide an accurate picture of their future value throughout the mortgage term.
This is clear in savings plans or pensions but there are certain plans – such as the sale of a business or inheritance – that cannot provide the required level of certainty. That’s why we’ve taken the step of saying we no longer consider these acceptable.
This will be an area that we’ll be paying more attention to as time goes on. We’ll ask for evidence of repayment vehicles and strongly encourage customers to regularly review their plans to ensure they’re on track.
Brokers should also take the time to build this into their customer strategy and ensure they are confident that interest-only customers are aware of the responsibility they’re taking on.
We’re serious about our commitment to interest-only and that’s why we’re working across all brands, in branches and the intermediary channel to embed our new approach.
Brokers have a role in working alongside us to ensure everyone understands the responsibilities involved with interest-only borrowing and lending.