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Restricting interest-only leads to sustainable market

Restricting interest-only deals will lead to a more sustainable mortgage market, says Capital Economics.

Paul Diggle, property economist at Capital Economics, says the high-level of interest-only lending in the boom years fuelled house price rises.

He says: “Certainly, the shift away from interest-only mortgages will bring some short-term pain, as it presents yet another hurdle to first-time buyers trying to get a foot on the housing ladder by further reducing their purchasing power.

“But ultimately, the shift towards repayment mortgages may help to close the gap between house prices and earnings, and therefore marks an important step towards a more sustainable mortgage market.”

Council of Mortgage Lenders’ figures out this morning show that the proportion of first-time buyers borrowing on a repayment basis in October was 93%.

This is the highest proportion since records began in 1974.

Prior to the 2007 crash, repayment mortgages generally accounted for just 30% of mortgages made to first-time buyers.

Diggle adds: “Anecdotal evidence suggests that this shift has been largely driven by the changing policies of lenders.

“We’ve suggested previously that this could well be a pre-emptive move ahead of anticipated FSA regulation addressing interest-only mortgages.

“In addition, there appears to be a growing recognition amongst lenders that, by and large, repayment mortgages are in the best interests of most borrowers. If this is the case, and if it continues to be the attitude lenders take even after their ability to lend recovers, then it is a welcome development. It is certainly a view that we share.”

But Capital Economics defends the role of interest-only for certain borrowers with separate repayment vehicles.

It highlights the example of borrowers with varying monthly incomes and those on bonuses on commission.

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  • S.Davies 11th December 2010 at 11:24 pm

    “Paul Diggle, property economist at Capital Economics, says the high-level of interest-only lending in the boom years fuelled house price rises”. This analysis sounds a bit simplistic to me. Surely the growth in other types of lending also contributed towards the house price bubble, such as self cert, BTL, sub prime, second charge, bridging, high LTV etc. Or am I missing something?

  • Jon Hoar 10th December 2010 at 5:37 pm

    Great danger in treating all borrowers-to the same stright jacket regieme-in effect a dumbing down, of a borrowers ability to take responsibity for their own actions-selective common sense regulation ‘Yes’-one size fits all:- No-not the way to go.

  • Rodney Sulkin 10th December 2010 at 5:16 pm

    Little attention is paid to the fact that in many instances people have moved every 5-6 years and would have paid back a small amount of capital, but would have had much larger payments to make with little benefit. The assumption always seems to be that the mortgage will last much longer than is usually the case.