November 25th, 2014
For any borrower who has raised the question of whether borrowing on an interest only basis was possible over the past 4-5 years, the much heard response that this is no longer an option will sound like old news. Just after the financial crisis arose in 2008, lenders across the market took the most severe approach to claims that poor lending practices had aided the collapse.
As a response to these accusations, lenders chose to either completely eradicate the option from their range of repayment strategies, or set out the underwriting process in such a way to be prohibitive to the point that successfully agreeing terms for such a mortgage felt akin to a minor miracle.
While the news that Leeds Building Society have chosen to re-introduce interest only options may, on face value, not appear that monumental, especially when taking note of the minimum deposit required at 50% of the property value, the encouraging point is that it appears lenders are incrementally reviewing lending practises post-Mortgage Market Review.
While the review has been much maligned for the disruption caused for lending, since its introduction in the second quarter of 2014, the feeling in the mortgage sector is that it will provide lenders confidence to begin offering a more diverse range of choices for borrowers.
Brokers have often called for a more relaxed approach to interest only, pointing out that the repayment methodology itself was not the issue, but that lenders agreed mortgages for borrowers who had no business considering this as a viable option. Indeed, the general manager of business development for Leeds, Martin Richardson, stated that the return of interest only to the Leeds stable is meant to assist “underserved customers in this market.”
Simon Butler, a mortgage broker for Contractor Mortgages Made Easy, said yesterday: “The main concern with interest only options was that borrowers had been agreeing terms for mortgages that on a capital and interest repayment basis would be wholly unaffordable.
"This led to evidence that borrowers were not reducing the debt to a manageable level to tackle the affordability issue for the future, provoking a blanket approach to restriction across the board.
“Checks on repayment vehicles were, to say the least lax, but have now swung completely the other way. A bizarre request from most lenders has arisen for a borrower to be able to put forward a savings vehicle or secondary property that holds the requisite funds to repay the loan from the outset. If a borrower holds the funds in the first instance, there is not a great deal of sense in paying interest for a mortgage that is not required.”
Although the deposit position is often problematic, many brokers point to the fact that higher earning individuals should be the focus for interest only loans. Some lenders have chosen to position their interest only proposition in this manner, with Virgin Money looking for a minimum joint income of £100,000 for a borrower to proceed. However, the lender also limits the option to a minimum loan size of £500,000, although they consider offering loans to a maximum of 70% loan to value.
Butler pointed to this policy when illustrating the issues borrowers face when trying to raise funds on an interest only mortgage: “The contradiction with the Virgin policy highlights the attitude from many lenders to the repayment method. On the one hand, a sensible marker for a minimum income requirement and a reasonable loan to value are implemented. On the other, any borrower with a requirement for a mortgage below the £500,000 mark, with or without a realistic repayment strategy, is completely shut out from borrowing on this basis.
“The message remains that lenders are too concerned about exposure to consider loosening criteria on these options at the moment. This could change as competition for business increases next year, but expectations of returning to certain aspects of pre-credit crisis underwriting should not be envisioned for the time being.”
Article By: Mark McBurney, Senior Mortgage Consultant at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager
Tel: 01489 555 080