Thanks to the credit crunch and ensuing recession, we have already seen the demise of the 100% mortgage, and reports in the media this month indicate that we could now be seeing the death of the interest-only mortgage.
According to an article by Bower Mortgage Company, many lenders are already phasing out interest only mortgages, including the likes of the Halifax, Yorkshire Bank and Britannia.
We all know that lenders have tightened their lending criteria and borrowers now have to find a larger deposit than in recent years. Gone are the days when a first time buyer could secure a 100% mortgage or even borrow more than they need to get work done on a property. Attaining a mortgage has become more difficult than ever for those with fluctuating incomes, such as the self employed, or those who have had credit issues in the past.
Now, the Halifax has added a premium of 0.2 percent to its interest only loans and this trend looks set to continue.
With an interest only mortgage, borrowers are expected to make monthly repayments to the lender that cover the interest only – paying nothing off the capital. They are also meant to put money aside into another investment vehicle. The idea is that the money set aside for the capital may grow at a rate faster than the interest rate the borrower could have got from the lender, thus at the end of the mortgage term the borrower hopes to have enough money saved to pay off the capital and may even have a surplus.
However, it is generally believed that most borrowers do not put any such money aside. Instead, they squander the money and at the end of the term, are forced to sell the home or remortgage to a repayment mortgage and effectively start the mortgage again! The default rate on interest-only mortgages is far higher, and so many banks are now understandably nervous of approving this sort of home loan.
Unfortunately, these changes are expected to take effect across the entire mortgage industry and so everyone will be affected. Interest only loans have been popular in the past with the self employed, buy to let landlords and first time buyers as they kept the monthly repayments flexible and lower – and for landlords, made the accounting far easier.
Bower Mortgage Company’s MD, Geoff Charles, commented in his article on the positive aspects of the news:
“Interest only mortgages should never have been seen as a permanent solution. With these interest only loans being phased out by major lenders, it may make people sit up and realise that by seeking independent financial advice there could be better options available to them.”
Many mortgage advisors will be looking through thousands of products to find the best solution for their clients. Those taking CeMAP training to become a mortgage advisor will learn about all the different types of mortgage – past, present and those that may be phased out in the next few years.