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This week in the papers journalists have been exploring the ‘return of the million-pound interest-only mortgage’. At Enness we’re not so sure we consider it a return. While these products have been consistently accessible to us for over a decade, we would agree that the million-pound interest-only mortgage is becoming increasingly available – a trend we would like to explore for those interested readers out there.
Since the financial crisis, the interest-only mortgage has generally been the prerogative of private banks, and available only to those who are ultra-wealthy. This month, however, we have seen a flurry of more mainstream lenders injecting some competition into the interest-only mortgage range, demonstrating a renewed confidence in the market.
Interest-only mortgages are particularly sought after by people who want to keep their repayments down so they can afford London’s ultra-high property prices. The interest-only mortgage won itself a bad name during the financial crisis when they were seen to epitomise the ‘irresponsible lending’ of the preceding years. As a consequence, many such deals disappeared from the market in 2012 as the bulk of lenders began to see them as too risky.
However, today, thanks to the checks enforced by the Mortgage Market Review (MMR), it is not possible to obtain an interest-only mortgage unless you can fully prove your ability to service the level of borrowing you need, should your circumstances change. The FCA (Financial Conduct Authority) have been putting pressure on lenders to remind clients they will need to repay the capital and that borrowing is only a temporary thing.
Interest-only mortgages are often the best solution for clients who own their own businesses or expect other assets to appreciate in a few years, so they can pay off the debt in one payment. In this seller’s market people who own multiple properties, some of which they may not wish to yet sell, or who are entrepreneurs with the bulk of their capital invested in property, are very interested in interest-only mortgage solutions. They will be seeking these for their remortgage plans this coming year before the impending base rate rise.
Of late, lenders have adjusted to the new borrowing rules and are less stringent in their client criteria. Keen to drive new business, they are increasing the availability of the interest-only mortgage in their offering. However, it is important to remember that the interest-only mortgage is not targeted at a widespread majority; rather the lenders have a very specific sort of client in mind.
And what is that sort of client? Well, you no longer have to be ‘ultra-wealthy’; but being wealthy or on a promising career path is certainly a requirement. The banks are seeking higher earners with large deposits (nearing even 50%) who have credible mortgage repayment prospects.
Although all is not lost some lenders have been a bit more ambitious, such as Kensington, and are willing to allow smaller deposits (only 25%). Building societies Nationwide, Coventry and Yorkshire are yet to jump on the bandwagon, although watch this space.
Even NatWest has re-entered the interest-only sphere after a three-year absence but requires £100,000 of basic salary excluding bonuses, and the client to have a staunch repayment plan in place.
Islay Robinson, CEO of Enness Private Clients, says: ‘An interest-only mortgage can be the right choice if you have a well-thought-out repayment strategy in place and a good salary. Problems arise if borrowers don’t factor repayment of the debt into their finances.