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For years, clients with large mortgages have benefited from arranging their loans on an interest-only basis. Clients have enjoyed the ability to pay off chunks of capital on an ad hoc basis from bonuses, commissions and investments rather than being committed to a repayment mortgage.
Now, however, a lack of large interest-only mortgage options is making the process difficult. Over recent years, concerns over repayment vehicles and falling house prices have resulted in lenders restricting access to interest-only mortgages. And, leading London mortgage brokers believe this is bad news for high net worth mortgage clients.
So, are the days of the interest-only mortgage over? We investigate.
In the years preceding the ‘credit crunch’ there was an explosion in the number of interest-only mortgages in the UK. Council of Mortgage Lenders figures showed that a third of all mortgages were arranged on this basis in 2007.
The amount that you borrow on an interest-only mortgage does not reduce over time. You pay interest to your mortgage lender with the intention to repay the capital through savings, investments, pensions, inheritances, bonuses/profits or the sale of assets.
However, the Financial Services Authority (FSA) says that 80 per cent of interest-only mortgages have no repayment strategy in place. And, lenders are increasingly cautious about lending on an interest-only basis, particularly at higher loan to values.
Santander has recently reduced the maximum limit for interest-only lending from 75 per cent to 50 per cent. And, the Spanish bank will no longer accept pensions, bonuses, cash savings or the sale of a second property as an acceptable repayment vehicle for the loan.
Hugh Wade-Jones, director of the large mortgage specialist Enness Private Clients, believes that interest-only mortgages have a valuable role to play in the mortgage market, and says that lenders’ caution is having an impact on high net worth finance clients, as we see next.
Clients with large mortgages often have a wide range of repayment vehicles in place for their home loan. However, changes to interest-only criteria are making it more difficult for high net worth clients to get the most appropriate mortgage.
Mr Wade-Jones, the London mortgage broker, said: “Many clients that I deal with have significant assets, bonuses, share options or investments that they intend to use to repay their mortgage. However, lenders are increasingly reluctant to accept these as an acceptable repayment vehicle.
“What this means is that clients are increasingly being forced onto a repayment mortgage, which compels them to repay capital every month. This can’t be the best advice, and we are increasingly seeking out new lenders who are prepared to take a client’s overall financial position into account when agreeing on a large mortgage – as a result, interest only is far from dead!.”