Interest-only mortgages 'becoming niche'
In the game of snakes and property ladders, winning now looks a lot more difficult for young buyers.
Not that long ago, lenders made it easy for people in their early 20s to climb onto the nearest ladder by offering interest-only mortgages.
As house prices rose year after year, homes looked like a solid investment. There appeared to be little danger of buyers slipping down to where they started.
Then the financial crisis hit, the board became a seething mass of snakes, and the property market did not seem as easy to play after all.
So, how has the game changed now, and what is facing those who fell back to having to start all over again?'Robust plans'
With an interest-only mortgage, householders pay off the interest on the loan but not the capital. At the end of the mortgage term, borrowers are expected to repay the capital.
The attraction of interest-only mortgages was obvious to many young first-time buyers. Many were aged in their early 20s, had just started their first job, and were happy to put off any real consideration of how they would pay the loan back, or to rely solely on the rising value of their home.
End Quote Martin Wheatley FSA managing director
Lenders must ensure these mortgages are taken out by consumers with a concrete repayment plan”
In addition, they were cheaper than the repayment option.
But, as they became more and more popular, this type of mortgage was placed more frequently under the microscope of the City regulator - the Financial Services Authority (FSA).
In 2006, when 24% of all new mortgages were lent on an interest-only basis, the FSA said most people with interest-only mortgages did not have "robust plans" to repay them
"There is nothing wrong with interest-only mortgages," said Clive Briault, of the FSA, six years ago. "However, consumers must be very clear about how they are going to repay the loans they take out."
That comment may sound familiar because just a few weeks ago, Martin Wheatley, the managing director of the FSA said almost exactly the same thing.
"There is a place for interest-only," he told a mortgage industry conference. "Lenders must ensure these mortgages are taken out by consumers with a concrete repayment plan."
The fears may not have changed, but the market for interest-only mortgages certainly has.
In the last week or so, RBS, NatWest and the Coventry Building Society have pulled out of the market altogether. They followed a withdrawal in October by the UK's biggest building society, the Nationwide.
"Whether this is the ultimate final nail in the coffin remains to be seen, but it does look increasingly like interest only is destined to survive only as a niche product or the preserve of the wealthy through the private banking fraternity," said Andrew Montlake, director at mortgage broker Coreco.
The only lender to ease its stance is Santander which, after cutting back sharply on interest-only, is now allowing a mix of interest-only and repayment under a new deal.'Niche product'
The FSA would be pleased to see interest-only disappearing for good as a mainstream product, but that is not a view shared by everyone.
How many outstanding mortgages are interest-only?
- London: 52.6% of all outstanding mortgages
- South East of England: 52.4%
- South West of England: 51.2%
- East Anglia: 42.3%
- Wales: 41.2%
- Northern Ireland: 41%
- West Midlands: 38.8%
- North West of England: 36.5%
- East Midlands: 34.3%
- Scotland: 33.8%
- Yorkshire and Humberside: 33.3%
- North of England: 32.4%
Source: Moody's Investors Service
Jonathan Harris, director of mortgage broker Anderson Harris, said: "Interest-only is increasingly becoming a niche product, the preserve of wealthier borrowers. It is a shame as you don't necessarily have to be wealthy to have a viable repayment strategy for an interest-only loan."
That refers to people like Malcolm King. He took out an interest-only mortgage more than 25 years ago, says he has never missed a payment, and has always had a plan to pay off the capital - based on investments and the success of his business.
"I made a decision and take total responsibility for it," he says. "Most people went into this with their eyes open."
He says that, as he is now aged 61, he had to "grovel" to his lender to be allowed to continue borrowing on the same terms, even though he had a successful business and a solid repayment plan.
It is likely that Mr King, who lives in Cobham in Surrey, will not be the only homeowner in his part of the world facing the need to grovel to a lender.
A recent report by Moody's Investors Service suggests that more than half of all outstanding mortgages are interest only in the south of England, compared with a third in the north of England.
"Less creditworthy borrowers [are] at risk of being unable to refinance onto new rates," the report said.
This means they face being locked into a mortgage, and have no choice but pay higher rates when their current deal expires.Affordability test
Under FSA regulations, which will come into force in April 2014, lenders will have to put this repayment plan under greater scrutiny with a full affordability assessment.
To help these mortgage prisoners, the FSA has suggested that a new or existing lender can waive the rules for borrowers, who demonstrate a good payment history and do not want to increase the loan, to be able to shift onto a new deal.
In contrast, first-time buyers will be given the third degree.
The effect of this, according to estate agents, is that most are seeking the financial help of family and friends, and ensure they have their mortgage agreed before they even start searching for a home.
Beckenham in Kent is a prime spot for such buyers. Good schools and convenient links to London mean it is popular with young families and professionals.
But, according to Robert Dabrowski, of estate agent Langford Russell, the interest-only mortgage is a "dead market" to those first-time buyers they see.
As a result, he says that first-time buyers have got older recently, and he is seeing more people buying as couples rather than on their own.
Warren Pinner, sales director at neighbouring Curran and Pinner, says that first-time buyers with their finance already organised can make life a lot easier for estate agents.
However, he predicts a steady return among some mortgage providers of home loans with an interest-only element. This is not a view not shared by everyone, and would certainly not mean a wholesale return of solely interest-only mortgages.
This may place more snakes on the property board, but they should be easier to avoid for those seeking to climb onto the nearest ladder.