Lax lending over the past 10 years has been singled out for its role in creating the mortgage time bomb but this does not mean we should do away with interest-only altogether. It just needs tightening up
Coventry Building Society is the latest lender to axe interest-only mortgages for first-time buyers in a move that is being seen more and more across the industry. Lenders are increasingly nervous about offering this type of mortgage.
The Financial Services Authority is putting increasing pressure on lenders to help diffuse the mortgage time bomb it believes has built up over the past 10 years, as potential first-time buyers scrambled to get a foot on to the housing ladder.
Lenders tried hard to find ways of stretching affordability and interest-only mortgages gave borrowers the option of simply meeting the interest payments, giving them much more borrowing power.
Any rational person would look at this strategy and immediately see the flaw in an idea which failed to consider how borrowers would repay the mortgage.
If the lender is satisfied the customer is going down the interest-only route for the right reasons, it works
Borrowers didn’t devote too much time to worrying about this either, having persuaded themselves that the price of their property would keep on rising, rendering their mortgage irrelevant when they came to sell. Sadly, in hindsight we can see the folly of this action but to most people it made perfect sense at the time.
Now the FSA is ratcheting up the pressure on lenders to do their bit to reduce this overdependence on long-term never-decreasing debt. This means that for many individuals borrowing is going to get more expensive in future, with even current mortgage payments set to rise significantly. Interest-only does still have its place though, either where clients can demonstrate that they have a suitable repayment vehicle or for those with buy-to-let mortgages, where interest-only provides flexibility.
As long as the lender is satisfied that the motives are sound and that the customer choosing to go down the interest-only route for all the right reasons, then it works. My fear is that we will see a blanket approach to this that won’t allow any variance and will overlay the nanny state mentality on every borrower. This will only serve to further stifle an already suffocating market.
Peril of insurance short cuts
Insurers appear to be becoming more selective about the property risks they are prepared to take so it’s worth taking a little time before completion to make sure you can get buildings insurance for clients.
In the past decade we have seen more properties built on flood plains and brownfield sites, making them more susceptible to flooding or subsidence. Even if there is no evidence that a property has experienced a problem in the past, clients could be tainted by insurers’ approach to the risk posed by a particular area.
We all expect a challenge insuring listed buildings and cottages with thatched roofs but this new blight is starting to affect newer homes and could put clients in a tricky situation without suitable insurance.
There is a temptation by some to under-insure especially if the cost is high but this can be an expensive short cut. Most policies today are bedroom rated, meaning the sum insured is based on the postcode and number of bedrooms, so under-insuring is irrelevant. But those who insure on a sum-insured basis: be careful to avoid short cuts.
If an insurer finds the property is under-insured when it comes to a claim they may invoke a little-known clause allowing them to introduce a penalty, which could leave your clients exposed.
Bargains to snap up in US
As the property market shows signs of contracting slightly from the growth seen since the start of the year, investors are looking to the US for bargains, with international investors flooding the market at levels not seen since the 2004 boom.
A new phrase around property has emerged in parts of the US in the past couple of years – foreclosure sales. These are properties that have been repossessed and put on the market at an aggressive price.
The lender is not interested in holding the asset and just wants to realise what it can from it. In parts of the US it is not unusual to see foreclosure sale prices running at a quarter of what the property would have sold for a few years ago and it is this potential that investors are seizing.
Rental yields in excess of 20% are not unreasonable but it depends on where you buy as every state has different trends.
The strongest housing markets include Atlanta, San Francisco and Boston, while Denver, Detroit and Las Vegas are less buoyant.
Florida outpaced the US in general, according to the National Association of Realtors, and it remains a favourite with British buyers.