Your IndustryMay 26 2016

Availability of interest-only mortgages

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Availability of interest-only mortgages

In 2007, just before the global financial crisis saw lenders retract from the market en force, interest-only mortgage sales equated to one-third of all mortgage sales.

According to data from the Council of Mortgage Lenders, this was the interest-only market peak but, as the first article showed even then this type of loan was already facing regulatory headwinds and the prospect of new rules such as the Mortgage Market Review.

While many high street banks such as HSBC pulled out, other more niche lenders remained. These include Virgin Money, Aldermore, private bank Coutts and various building societies.

The market contraction has made shopping around more difficult for the average consumer - and sometimes frustrating brokers attempting to get the best possible solution for their higher net-worth clients.

Jonathan Harris, director of London-based Anderson Harris, says: “The previous climate was irresponsible so the changes were welcome, but there are still some borrowers perfectly suited to interest-only, such as those in receipt of predominantly bonus-driven remuneration.

With some smaller lenders recently relaxing lending criteria and winning market share, some banks are now re-entering this space Roland McCormack

“We have gone from one extreme to another. Things had to change but the pendulum has swung too far.”

Competition

Competition from the smaller lenders and building societies, combined with better terms and conditions and tighter lending criteria, may see some banks start coming back to the market with interest-only or hybrid options.

Not everyone is returning but, as Jaedon Green, director of products and distribution for Leeds Building Society, says, this is a sign of a good market. “It should be expected different lenders are active in different areas as part of a healthy and competitive market.”

Any improvement in availability will be a slow process, as Roland McCormack, intermediary director for TSB, explains: “With some smaller lenders recently relaxing lending criteria and winning market share, some banks are now re-entering this space and adjusting their own criteria.

“However, lenders are likely to remain cautious, despite the suitability of an interest-only product for some groups, such as high earners with irregular income.”

TSB is a relative newcomer, having launched in September 2013, after being divested from Lloyds Banking Group. It offers interest-only mortgages, subject to customers meeting qualifying repayment strategy criteria and having a loan-to-value (LTV) up to 75 per cent.

Currently, Bank of Ireland offers up to 60 per cent LTV, with rates starting from 1.5 per cent.

Aldermore considers owner-occupier interest-only applications for up to 75 per cent LTV, and 80 per cent for most buy-to-let properties.

Other lenders have started to return. NatWest, for example, pulled out in 2013, but as FTAdviser reported last year, Natwest Intermediary Solutions reintroduced residential interest-only mortgages for new business from 21 September 2015, with a maximum loan-to-value of 75 per cent.

Applicants need a single gross annual income of at least £100,000, excluding discretionary bonuses, and have an acceptable repayment strategy in place. There are restrictions if the borrower intends to sell their home to repay the loan.

Mr Green says: “An increasing number of lenders ensures there is a sizeable market for borrowers wanting an interest-only mortgage, although it can no longer be used as a way of accessing a larger loan than would be available on capital and interest.”

LTV frustration

Given the current level of house prices, the fact many existing interest-only providers have a 75 per cent upper limit on loan-to-value can also prove problematic for brokers.

Based on the current average house price, which according to the Office for National Statistics £284,000, finding a 25 per cent deposit equates to £71,000. For someone in receipt of large lump-sum bonuses, this might not be difficult but for others, it’s a large sum to save up.

Mr Harris explains: “In terms of whether you can get interest-only borrowing for your client or not, it all depends on the LTV required.

“At 50 per cent LTV there is good choice but above that, it gets trickier.”

The LTV is not the only condition which lenders are imposing.

Charles Haresnape, group managing director of mortgages for Aldermore, says: “While there are still lenders operating in the market, with recent years seeing a slight increase, interest-only products may have several conditions attached to them.”

Like NatWest Intermediary Solutions, Mr Haresnape states Aldermore requires applicants to “have a suitable repayment strategy in place to ensure they can pay off the outstanding mortgage balance at the end of the term”.

According to Mr Harris, such strategies include guaranteed bonuses, sale of investments or an inheritance. Not many lenders allow the sale of the property in question as a repayment strategy.

But some do still allow the sale of the property as capital repayment.

Mark Howell, director of marketing and customer management for Bank of Ireland, says: “BoI now allows the sale of the mortgaged property as a repayment strategy for those with some level of equity in their property. We see interest-only as a viable product for the right client.”

“There is more choice than there has been”, says Andrew Montlake, director for Coreco. “Several mainstream lenders are offering sensible interest-only policies. It would be much better if there were more choice, which will come over time, but it is a start at least.”