On its mainstream introducer range last weekend Halifax extended to fixed rates the policy it introduced a month ago on trackers of charging borrowers an extra 0.2% if they choose an interest only mortgage rather than repayment.
In a piece of spin that Alistair Campbell would be proud of Halifax claimed that “we launched it (higher rates for interest only mortgages) with our trackers to see how it went. We’ve kept an eye on it and now we think it is appropriate to apply it to our fixed rates. It makes sense from a customer’s point of view to reward those customers that are doing the more responsible thing by repaying capital”.
It would take more than a month to genuinely make a judgment on this sort of new policy and so I have little doubt the plan all along was to introduce this change on a staggered basis.
Another way of putting this is that Halifax is penalizing customers who want an interest only mortgage. If the repayment rates had been reduced and the interest only rates kept the same it might just have been justified in saying that those opting for a repayment mortgage were being rewarded, but this doesn’t wash because the repayment rates were maintained and the interest only rates increased.
As to whether it makes sense from a customer’s point of view that is not Halifax’s call. The broker is advising the client, not Halifax, and so as it is not giving any advice to the borrower how can it possibly know for any individual borrower whether or not a repayment mortgage is the best way to repay a mortgage.
Clearly Halifax, like every other lender, is absolutely entitled to choose the terms on which it is prepared to lend, but it should be more honest about the real reasons for introducing this change.
From a risk perspective there is certainly an argument for differential pricing on high LTV mortgages, but the lower the LTV the less this argument applies. As intermediaries’ responsibility is to recommend the best value mortgage for each customer this move by Halifax means that for clients wanting an interest only mortgage it is less likely to get the business, particularly as even its mainstream repayment rates are not currently competitive.
Presumably Halifax wants to reduce the proportion of interest only mortgages on its books and in that respect this pricing change should have some effect, providing other lenders don’t follow suit, which, so far, they haven’t. Indeed, nor, so far have other lenders in Lloyds Banking Group, but what I do find strange is that Halifax’s branch products do not have this pricing premium for interest only. This only makes its current dual pricing policy even worse.
Hopefully those lenders with more challenging lending targets than Halifax will be reluctant to follow suit, although any significant policy change by a major lender usually results in some copy cat activity and so this will be something to watch out for over the next few months, especially as there appears to be some pressure from the FSA over interest only mortgages.
I find this a little strange bearing in mind that in the FSA’s last thematic review of interest only mortgages it found that 90% of borrowers with an interest only mortgage had a “robust repayment plan”.
Sold correctly, there is absolutely a valid place for an interest only mortgage but I do not believe it should normally be sold alongside a new repayment vehicle, which implies a monthly investment into a stock market based investment, probably an ISA.
Despite the tax breaks most stock market based ISAs are actually higher risk than an endowment as the ISA will probably be 100% invested in equities, whereas, for all its faults, the with-profits endowment would at least normally have a more diversified investment base, including fixed interest stocks and property.
If an endowment became too risky a way to repay a mortgage so is an ISA, although a minority of borrowers who understand the risks will happy to accept these risks in exchange for the potential returns. “What a client with an interest only mortgage actually needs is a robust repayment plan, which might include some existing or new monthly investment policies but can include a variety of things.
Discussing with a client how the mortgage is going to be repaid is an integral part of the advice process and should be a key part of the discussion any mortgage adviser has with his client. Where a client is using a broker it is the broker who is responsible for the advice, not the lender, and so Halifax is not at risk in this respect.
For borrowers who receive a good proportion of their income on a non guaranteed basis, whether employed or self employed, setting up the mortgage on an interest basis and repaying it by making overpayments in the good months can be a very sensible way or repaying the mortgage, providing they make sure not to incur any early repayment charge.
Such a strategy minimises the risk of going into arrears, which is good for the lender as well as the borrower, as only a minimum payment is mandatory, and the borrower can choose when to pay extra. This does require discipline and so is not suitable for everyone, but it can work very well for disciplined borrowers who regularly receive sizable bonuses, perhaps annually or semi annually, as well as the self employed.
The reality of course is that most mortgages, whether repayment or interest only, are actually repaid from the sale of the property but the quicker a mortgage is repaid, or its size reduced, the less interest will be paid. Furthermore by paying down a mortgage and hence creating more equity for when one wants to move the next mortgage will probably be cheaper because a bigger deposit will be available from the sale of the previous property, reducing the LTV required for the new mortgage.
One thing borrowers should not do under any circumstances is to rely on an increase in the value of the property as a way of repaying the mortgage and/or creating enough equity to buy another. Such an increase may well happen but it leaves the borrower a hostage to fortune and no where to go if property prices fall or stagnate.
On a positive note to end, despite charging an extra 0.2% for an interest only mortgage, a plus for Halifax is that it is one of a small number of lenders still offering interest only as an option on LTVs up to 85%.
Most lenders restrict interest only to LTVs up to 75%. It is also not currently charging a premium for interest only on its large loans range for mortgages between £500,001 and £7.5m.
A disproportionately large proportion of borrowers in this category will tend to favour interest only as these high net worth borrowers will often want more flexibility in their repayment arrangements and as Halifax is one of the few mainstream lenders playing in the £1m+ market I hope it recognises that charging a premium for an interest only mortgage in that part of the market would be particularly inappropriate.