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.