Some of the people leaving comments on Mortgage Strategy Online last week criticising Nationwide’s decision to insist on a minimum LTV of 66% and equity of £150,000 for an interest-only mortgage should think carefully about what they are saying.
The reason for the clampdown is because too many borrowers were badly sold interest-only.
The number of remortgage enquiries I am getting for applicants who are over the age of 60 and have come to the end of their original term but have no capital provision is mind-boggling.
Too many interest-only borrowers now have to mortgage for life but often one applicant dies leaving their spouse with insufficient income to maintain the loan.
It will be a grim day when there are a lot of elderly borrowers who are facing repossession orders because no capital provision has been made.
I was also fascinated that interest-only should be compared with renting as this is effectively espousing the above scenario but forgetting a few issues.
In a normal rental situation the landlord gains the advantage of the capital increase in exchange for the risk but a lender derives little benefit from these types of lifetime loans.
Long-term interest-only loans also substantially reduce the availability of funds for lenders to pass on to people entering the market simply because the capital is not returned for decades.
In truth, interest-only should be surcharged just to make them as profitable as repayment loans. I could show how the maths on this would work but that would take up too much space.
However, I suspect that if a proper rate was charged for interest-only then brokers would be up in arms about treating customers fairly again.
I do wonder how many of them truly understand the concept of TCF.
The reality is that lenders lend the money to help people buy a home, not to become de facto landlords.
I have always felt that interest-only has its place in the market but only if the borrower makes proper provision for the repayment of the capital.
The concept of interest-only was never based on allowing borrowers to have more disposable income to spend on holidays or new cars as the lender always expected them to make provisions to honour their contract with the lender. A mortgage is a legal and enforceable contract.
I know that most brokers have offered sensible advice when selling interest-only loans to their customers but there are also too many who used it as a vehicle to show mortgage applicants cheaper monthly payments.
It’s the latter group which is now reaping the result of this sales technique.
Tough interest-only policies are being driven by regulator
With regard to Tessa Norman’s blog on Mortgage Strategy Online about how some lenders such as Nationwide will only lend on an interest-only business to a maximum LTV of 66% and require £150,000 worth of equity in the property, I was interested to read about the North-South divide opening up.
As the article points out, some properties in the North are not even worth £150,000.
Ray Boulger, senior technical manager at John Charcol, hypothesises that the policy is odd, but Nationwide is not alone in exercising such restrictions and it could be that the move is being driven by the Financial Services Authority.
“Many larger lenders have a similar policy which is why many brokers are turning to smaller lenders instead,” he says in the blog.
Boulger is right. The FSA has ridden roughshod over the Mortgage Market Review consultation process and the law by postponing the formal legal process and bringing in these restrictions anyway, despite assurances it would not do so until the time is right.
I fear for the future of the housing market and of individuals who will lose their homes when rates rise. I will never be able to get a mortgage again, but the idea that those in the North are at some kind of disadvantage by having cheaper homes is bizarre.
Equity buffer will protect Nationwide and its borrowers
I think Nationwide’s £150,000 equity buffer is sensible and aimed at protecting the lender and borrower.
Interest-only mortgages where the repayment vehicle is the sale of property require two facets.
First that the property has sufficient value to repay the mortgage at the end of the term and, more importantly, that there is sufficient residual equity post-sale.
For the customer to then fund the purchase of another property, £150,000 doesn’t seem unreasonable.
Name and address supplied
MMR seems to be in practice already and making life difficult
My network is making it difficult to place interest-only mortgages now.
It has taken on board the FSA’s proposals as have lenders so the MMR is already implemented and needs no further discussion. All the regulator’s points have been put into force by lenders.
Anyone with a client bank stretching back for years will find it hard to remortgage interest-only clients. If they move they have to take out a repayment mortgage which is harder if they are less than 25 years from retirement.
When rates rise and people want to move or remortgage around eight million out of the 11 million mortgage customers will not be able to get a loan or change lender and we will have a tidal wave of repossessions.
This could have all been avoided but still, the FSA knows best, right?
There is reasonable criteria to apply for temporary switches
Nationwide and other lenders’ stance on interest-only is not logical. The sensible criteria for allowing a temporary switch to interest-only should take into account the following factors:
- The reason for the switch having to carry out essential repairs seems reasonable.
- The length of the switch the lender could easily allow this for an agreed period, whether it is three months, six months or longer.
- The extension to the term for example, is it reasonable that the client still has a mortgage with this interest-only period being tagged onto the term of the mortgage.
This makes more sense than the arbitrary criteria Nationwide applies, presumably to cut down on administration and not get involved in conversations with borrowers.
Name and address supplied
FSA should consider renting alternative before creating rules
When considering interest-only mortgages the FSA should be realistically looking at the only alternative renting.
Consider someone putting down a 25% deposit but to keep things affordable would prefer an interest-only mortgage, which seems reasonable.
Increases in property values over 25 years are proven, but even if they don’t go up over that period the client will be able to sell the property and take back the 25% deposit they put down.
But renting carries a premium, is more expensive on a monthly basis and will consistently rise in line with inflation. At the end of 25 years they will have little capital and no opportunity to benefit from price increases.
When considering interest-only it should be compared against renting. The ideal scenario is a mortgage on a repayment basis, but interest-only over a longer period is far better than renting.
Name and address supplied
100% Deal pricing is based on higher risk Aldermore is taking
I read with interest your Star Letter in the September 12 issue in which an anonymous reader questioned the pricing of Aldermore’s family guarantee mortgage.
The writer says that as 25% of the loan is secured against the parents’ property they could not see why Aldermore has to charge such an extortionate interest rate. And, as it amounts to the same risk as any other 75% deal it should price it accordingly.
The family guarantee deal is not a 75% LTV loan. We lend 100% of the value of the property to borrowers, most of whom will be first-time buyers.
We therefore have to set our pricing, taking into consideration the higher risk profile of the borrower and the higher cost of capital required to fund this type of lending.
When compared with other high LTV loans, Aldermore’s pricing compares favourably.
We also give borrowers the certainty of a three-year fixed rate and it is therefore unreasonable to compare the pricing with cheaper trackers and lower LTV deals.
The writer also says that if parents have the equity in their properties to secure 25% of the property value they should raise a deposit themselves, get a contract drawn up to secure their deposit and allow their children to get a sub-3% rate with any other lender.
Some parents may choose to do this in which case the lender may require them to confirm the cash is a gift and non-repayable.
But I suspect most equity-rich cash-poor parents would prefer to keep it simple and provide a guarantee, which is capped at 25% LTV and expires after 10 years, which means they don’t have to become borrowers themselves.
The important point about this product is that it gives first-time buyers a viable option and provides parents with a choice when it comes to helping their kids.
It won’t be right for everyone, but it addresses a pressing problem facing thousands of creditworthy borrowers who can afford monthly mortgage repayments but don’t have spare cash for a deposit.
Managing director Aldermore Residential Mortgages