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Do interest-only restrictions create North-South divide?

Ever since interest-only lending came under the spotlight in the Financial Services Authority’s Mortgage Market Review consultation papers, lenders have been making changes to their interest-only criteria.

But while policies such as having a lower LTV threshold for interest-only mortgages seem sensible, Mortgage Strategy was surprised to learn this week that certain existing borrowers are banned from making even a temporary move onto interest-only repayments – because their house isn’t worth enough money.

Mortgage Strategy was contacted by one Nationwide borrower on a capital repayment mortgage who wished to make a temporary switch to interest only in order to carry out some repairs on his home.

But he was told by the lender that he could only do so if he had an LTV of 66% or lower and at least £150,000 of equity in the property.

The borrower satisfied the first criteria but failed on the second – because his Lancashire home is worth less than £150,000.

According to the latest available Land Registry house price data for July 2011, the average house price in Lancashire is just £111,760, meaning the borrower is unlikely to be alone in his dilemma.

In fact, Nationwide’s £150,000 threshold policy appears to create a distinct North-South divide, effectively excluding the majority of borrowers in the North from transferring to interest only.

Land Registry data shows that all northern regions fall comfortably below the threshold – the average house price is £101,143 in the North-East, £114,452 in the North-West and £122,083 in Yorkshire and Humber – while all southern regions are significantly above it, with average prices in the South-East being £209,309, prices in the South-West being £174,946 and in London £346,416.

A spokesman for Nationwide says: “For those who wish to move from a repayment to an interest-only mortgage, it is right we ensure they have sufficient equity in their property – they must have £150,000 of equity in their home and the LTV must be no more than 66%.”

Ray Boulger, senior technical manager at John Charcol, says 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 FSA.

“Many of the larger lenders have a similar policy which is why many brokers are turning to the smaller lenders instead,” he says.

While it may be prudent to put restrictions on interest-only, one would have thought that lenders would have enough common sense not to ask borrowers to meet impossible criteria.

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  • Mark C 13th September 2011 at 4:49 pm

    The problem of I/O goes far wider than those who were put on I/O years ago. The FSA and the judiciary ensured lenders were forced to transfer to I/O for those in financial difficulty.
    The rights and wrongs of that can be debated for ever, but it has created long term issues for those who never had a repayment vehicle or even a plan in the first place that will have to be dealt with in years to come.
    Interest only is a massive time bomb this industry will have to face up to at sometime in the next ten years or so.And this time around their will be no innocent parties as Lenders , Brokers, FSA, customers and the Department of Justice have had a hand in the debacle.
    Bet it won’t be any Government Department taking any responsibility though.

  • Grey Haired Underwriter 13th September 2011 at 4:09 pm

    Bobby – I have heard of joint life cover and I would be very interested to know what the premiums would be for an older couple taking a mortgage to age 85? I would certainly want to allow for it in my assessment of affordability

  • Luke Atkinson 13th September 2011 at 12:14 pm

    I couldn’t imagine anything worse than living in the north.

  • Tom Cleary 13th September 2011 at 9:28 am

    Dear Anon 3.56pm. Clearly my comments were tongue in cheek. My point being is that property prices, employment, and too many other factors to list are responsible for the North/South divide, not Nationwide’s interest only policy. I am sure the everybody living in the South would much rather have much lower property prices so their children could actually afford to buy a property of their own one day, but that is the price we have to pay for living in a more affluent part of the country with greater employment opportunities. The interest only policy of a Building Society is a small price to pay for lower property values in my opinion and the article is moot in this regard.

  • ES 12th September 2011 at 5:50 pm

    DJR’s comment on comparing IO to rental is actually incorrect as IO depends on the amount of debt and level of interest rates (which we all know are at unsustainable, historically low levels). Rental needs to be compared to cost of ownership which includes depreciation, insurance, taxes, and cost of capital.
    IOs allow borrowers to purchase more property on the assumption that they will earn more in the future and real estate will appreciate. I thought we had learned those lessons in the early nineties.

  • Andy Valvona 12th September 2011 at 3:56 pm

    Anon 12.46

    This debate was a good one – with lots of views expressed well, good suggestions made, and was well balanced, with arguments made both in favour of, and against the stance that the nationwide have taken.

    That was until your point was made.

    Perhaps you might explain how your proposal would work in practice, what steps need to be taken, and by whom.

    I am afraid I, and most of your readers, I would suspect, are not at all impressed by your proposal, which has no detail as to how it might work, and, on the face of it, appears to be totally flawed.

  • Tom Cleary 12th September 2011 at 12:46 pm

    I have a very simple way to bridge the North/South divide. Let’s bring property prices in the South down to the same level they are in the North. That is the most fairest way to deal with it. What a pointless argument.

  • bobby 12th September 2011 at 11:42 am

    GHU

    Every heard of joint life cover ?. The remaining person would not be left with a mortgage debt if joint life cover was arranged, as it should be, at the outset of the mortgage.

  • Grey Haired Underwriter 12th September 2011 at 11:10 am

    I think that many of the above commentators should look at what they are saying very carefully. In the first instance the reason for the clampdown is because too many borrowers were badly sold interest only. The number of re-mortgage enquiries I am getting for 60+ applicants who have come to the end of their original term but who have made no capital provision is becoming mind boggling. The fact is that too many IO borrowers are now having to ‘mortgage for life’ but unfortunately one of the applicants dies and leaves their spouse with insufficient income to maintain the loan even at interest only. It will be a grim day when there are a lot of elderly borrowers who are facing possession orders because no capital provisioning has been made

    I was also most fascinated by DJR’s point that IO should be compared with renting as he is effectively espousing the above scenario but forgets 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 very little benefit from these types of ‘life time’ loans. These long term interest only loans also substantially reduce the availability of funds for any lender to pass on to new 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 the maths but that would take up too much space) but I suspect however that if a proper rate was charged for IO then brokers would be up in arms about TCF again (and I do wonder just 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 defacto landlords. I have always felt that IO has its place in the market but only if the borrower makes proper provision for the repayment of the capital. The concept of IO was never based upon allowing the borrower to have more disposable income to spend on holidays or new cars as the lender always expected them to make provision to honour their contract with the lender. And so that there is no debate, a mortgage is a legal and enforceable contract.

    I know that most brokers have offered sensible advice when selling IO but there are also too many who used it as a vehicle to show the applicant cheaper monthly payments. It was the latter group who are now reaping the result of their sales techniques.

  • DJR 12th September 2011 at 10:16 am

    @PW Point 2 is completely flawed. When considering interest only mortgages the FSA should be realistically looking at the only alternative – which is renting. Consider someone putting down a 25% deposit but to keep things affordable would prefer an interest only mortgage, which seems perfectly reasonable. Increases in property values over a 25 year period are proven, but even if they don’t go up over a 25 year period the client will still be able to sell the property and take back the 25% deposit they originally put down. Renting however, 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 had no opportunity to have benefited from any property price increases. So when considering interest only it SHOULD be compared against renting. Of course the ideal scenario is that the mortgage is on a repayment basis, but interest only over a longer period is far better than renting

  • Andy Valvona 12th September 2011 at 9:44 am

    This policy is not at all 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 3 months, 6 months or longer.

    And finally, the extension to term, for example, is it reasonable that the client still has a mortgage with this interest only period being tagged on to the term of the mortgage?

    This makes much more sense than the arbitary criteria Nationwide is applying – presumably because it wishes to cut down on admin, and not get involved in a whole load of conversations wuith borrowers.

  • bobby 12th September 2011 at 9:37 am

    My Network are making it very difficult to place interest only mortgages now. They have taken on board and ramped up the FSA’s proposals as have the lenders so the MMR is already implemented and needs no further discussion. All the FSA’s points have been put into force by the lenders. For anyone with a client bank stretching back for years they will find it hard to re mortgage interest only mortgages clients now and if their clients move will have to do a repayment mortgage which makes it harder if they are less than 25 years from retirement. We wil find when rates rise and people want to move or re mortgage around 8 million of the 11 millions mortgage customers will not be able to get a mortgage or change lender and then the whole thing will fold like a deck of cards with a tidal wave of repossessions. This could have all been avoided but still, the FSA know best don’t they ?.

  • PW 12th September 2011 at 8:53 am

    The £150k equity buffer is entirely sensible and is aimed at protecting both the lender and borrower alike. Interest Only mortgages where the repayment vehicle is Sale of Property require two fundamental facets. 1) That the porperty has sufficent value to repay the mortgage at end of term and, more importantly, 2) That there is sufficient residual equity – post sale – for the customer to then fund the purchase of another property and £150k seems a not unreasonable sum.

  • RW 11th September 2011 at 12:08 am

    The lenders don’t show themselves in a good light when they use OTT criteria like this. TCF being used only when it suits the lenders. Nothing will guarantee that a mortgage won’t default.

  • Stuart Duncan 10th September 2011 at 12:24 pm

    Ray Boulger is right. The FSA have simply ridden roughshod over the MMR consultation process and the law by postponing the formal legal process for this and bringing in these restrictions anyway, despite past assurances that they would not do so until “The time is right”. I fear terribly for the future of the housing market and for the future of individuals who will lose their homes when rates rise. I for one 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 rather bizarre.

  • Adrian Machen 10th September 2011 at 9:16 am

    Is it me or does that mean that someone who was at the maximum LTV to consider a move to interest only would need to have a property worth circa £450k?

    Surely that would rule out many in the South as well!?!