Interest only mortgage deals
Interest only mortgages are becoming a very complex area of home finance. Just a few months ago they were commonplace. All you were required to do was advise the lender of your repayment plan e.g. via saving, downsizing, inheritance or other means. Today it’s a totally different story.
With the Mortgage Market Review (MMR) poised to be implemented in the latter part of the year lenders find themselves scrambling to distance their association with perceived areas of lending risk such as ‘interest only’ mortgages. I share the view along with many other Commentators (and indeed many lenders behind closed doors) that this is another display of a ‘nanny state’ intervening and stifling consumer choice and freedom.
Virtually all of the clients I speak with are grown up to make their own decisions rather than be dictated to and placed in a ‘one-size fits all’ supposed consumer champion box. Every client is different and plans for retirement can be chalk and cheese. The lender’s are looking for certainty of repayment but life rarely works out like that. Anyone can loose their job for starters!
To make matters harder still Deposit accounts and Cash ISAs are amongst the most safest investments around but many lender’s are refusing to accept these as collateral for interest only loans due to the fact they are normally set up on an easy access basis. That’s right the lender’s believe the temptation to use the money for other things will distract you from repaying your mortgage. I disagree, I have been pleasantly surprised in this recession as to how quickly and prudently my clients have adapted to the harsh economy. They are not ‘carrying on regardless’ they are concentrated on doing the right thing and looking after their families. Therefore if they say they are earmarking money to clear debt why should this not be the case?
Similarly I have a many clients who plan to sell their buy-to-lets or are expecting to inherit the family home from their parents, and at which point they will use the proceeds to pay down their mortgage. It makes sense. Despite this being part of the fabric of their life-plan this would now be deemed by some lenders as ‘uncertain’ because the event might not happen. A little common sense and understanding would go a long way!
So what does it all mean for customers looking to take out a mortgage from a practical sense?
In short, depending on the level of your deposit you may be forced into repaying the capital of the loan within your monthly mortgage payment.
Lenders such as Santander, Woolwich, NatWest and Nationwide now insist on a deposit of between 25% to 50% in order to for you to have the freedom to repay the loan another way.
Being tied to a higher monthly payment will impact on your overall affordability and ultimately the level of which you can borrow at.
For example, you are five years into an investment bond that is going to yield enough to pay off your mortgage. You have therefore allocated part of your monthly budget for the bond. However, as you only have a small deposit for a property, the lenders will require you to repay the capital on the mortgage as you go as well. That’s right you are effectively, accounting for loan repayment twice, unless you cancel the bond mid-term which would undoubtedly result in you being penalised.
MMR is also suggesting that lender’s drill down to the nearest penny when calculating whether the customer can afford the mortgage now and in the future. In recent weeks we have seen lender’s ask for how much a client is likely to spend on Christmas presents each year and another building society, Leeds, succumb to the introduction of an affordability calculation away from the traditional method of income multiples, which has seemingly served them, and industry well. Rationale might suggest this is a good move yet I’m a great believer in the tried and tested, and surely it is not a question of whether income multiples work, they do and have done for many decades, it is just a question of making sure they do not deviate beyond a sensible level.
Therefore if you are looking at interest only mortgages it’s always worth talking to us to check your method of repayment and importantly how this needs to be evidenced, for example, you may need certain investment projections. It is counter productive to assume that the front line staff at lenders will know what their underwriters will want – actual first hand experience in this area is much more valuable. Similarly if you are concerned about affordability we would be happy to guide you further.
For more infomration on our range of Interest only mortgages please call us on 020 7993 2044 or simply complete the enquiry towards the top right hand sid of this page.
Author: Payam Azadi
Payam Azadi is a partner at Niche Advice who are whole of the market Independent Mortgage Brokers. His role is very much focused on Property financing both on residential and commercial lines.