We note the trend of lenders reducing the number of interest-only mortgage loans they have on their books.
In 2012 lenders had 2.5 million mortgages that were interest-only but that figure dropped by 25 per cent by the end of 2014 to under 2 million.
It has fallen 16 per cent in the last year alone potentially freeing up new lending for mortgage borrowers looking for flexible deals.
It is a significant drop and it shows that those who are on interest-only deals are being encouraged to move on to so-called capital repayments deals. This is where you pay both interest and part of the cost of your house each month.
The financial regulator, the Financial Conduct Authority has grown increasingly alarmed about the number of existing interest-only mortgages.
In the decade up to 2008 it is accepted that interest-only mortgages became too freely available and too easy to get.
Borrowers could buy a home on a cheap monthly payment through interest-only, rely upon house price growth to make them some cash and then sell up.
This was common practice. We believe interest-only should be a niche product for those with specific flexible needs that we can help meet.
They can include those working in financial services and receiving bonus payments or recruitment consultants gaining commission, for example.
Both take home irregular income so want a low monthly mortgage with the ability to pay off capital at irregular intervals. This could be after the January bonus season for financial services, for instance.
That is a common sense approach to have a credible repayment strategy in place and not to rely on house price growth alone. We can help those niche borrowers for whom it can be a genuinely useful and appropriate way of buying a home.
The FCA, rightly wants to stop those already on interest-only from falling into trouble. It branded the 2.5 million on deals in 2012 a “ticking timebomb” and demanded lenders start to defuse it.
The reason the FCA wants to defuse the bomb is because many interest-only mortgage borrowers come to the end of their 25 year terms having paid off nothing on the house. This leaves them with a huge loan to repay and no means at the end of the term to repay it.
Lenders have been scared off interest-only lending by a mixture of tougher regulation and already holding a large number of similar existing loans.
As they defuse the timebomb lenders potentially have more money and freedom to lend interest-only loans to appropriate borrowers today.
We know there are many people for whom it is the right choice but they can’t do it now. Hopefully the latest trends show it could be back in business for the right borrowers soon.
