March 20th, 2013
An in-depth report commissioned by the ratings agency Moody’s claims that as many as three quarters of all mortgage borrowers over the age of 60 are utilising the interest only method to repay their debt. In a year which has seen the vast majority of lenders restricting or even retracting the method completely as a viable plan of repayment, the news will bring the inherent issues of interest only usage back into the spotlight.
Since the beginning of 2013, the Financial Services Authority has publicly made it clear that regulations on the distribution and sale of interest mortgages needed to be far stricter, with mounting fears across the sector that repossession rates could spike if measures are not put in place to assist borrowers. At present, repossession rates are far lower amongst older borrowers than the figures evidence for younger property owners. However, the report provided by Moody’s states that arrears rates are in fact 1.2 times higher for those of pensionable age.
The report’s findings further evidence that at least 75% of mortgage borrowers over 60 are holding interest only loans. This directly compares with the far lower 42% held by younger borrowers, with the knock-on effect being markedly stricter lending conditions in the current market for all borrowers. The agency went on to state that of these older borrowers, around half of those with interest only based mortgages would have to be completely paying back their debt within the next four years, and with a highly competitive property market to contend with, they may not be able to sell to downsize to clear the debt.
Moody’s pooled information from banks and building societies that suggested the lenders have been looking to extend the term of the loans in a bid to stave off a wave of unwelcomed repossession statistics, as well as proposing a switch to a capital repayment loan to assist borrowers. A bigger concern is the situation for those unable to make the switch to repayment. The report noted: “should the borrower not be able to switch to a repayment loan, standard servicing practice is for the lender to require principal payments or for the loan to remain fully interest-only. Our lender survey indicated that in some extreme cases, the borrower could service the loan on an interest-only basis until their death."
Although the FSA has consistently branded the strategy as a risky proposition since 2009, clear reactions to lending interest only loans have only become widely evident since the turn of the year. Much of this reaction has come about due to the FSA’s proposed regulatory changes due in their Mortgage Market Review for 26th April 2014. The Review is set to outline what the FSA state to be “sensible lending practices”, in a bid to curb riskier lending decisions for a more secure housing and lending sector. However, some lenders have gone one step further by completely withdrawing interest only loans as a viable proposition. At the mid-point of 2012 the Co-Operative Bank chose to no longer offer these loans, and they are not alone in making this decision.
Any prospective borrower looking to raise a mortgage via the method will be subject to far tighter underwriting criteria, with the likely hood being that many will not be able to secure a mortgage on this basis. Simon Butler of specialist brokers, Contractor Mortgages Made Easy, said: “the current stance by most lenders willing to still entertain interest only as an option are marketing the methodology as a choice for those borrowers that fall into the category of higher net-worth candidacy. For instance, Virgin Money, like many others, will only offer interest only on mortgages over £300,000 and the minimum deposit to achieve this is 30%. That immediately rules out the vast majority of the first time buying market.
“In addition, lenders are now requesting a clear, defined and feasible repayment strategy to be set out from the inception of the loan. It’s no longer as simple as stating that existing or newly acquired ISA’s will cover the debt, as for many this will not be classed as realistic, especially considering the poor performance across the investment market in recent times. Proposing to downsize in the future will be met in most cases with an outright rejection, and it is becoming consistently likely that lenders will only entertain lending if borrowers are willing to take a repayment mortgage as a compromise.”
Article by: Jon Fields, Media Executive at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager
Tel: 0844 44 88 80