Some lenders are adopting draconian attitudes towards interest only mortgages. Last month, Santander announced that it was cutting the maximum loan to value it will lend on an interest only basis from 75% to 50%. This week, Nationwide and Coventry Building Societies have followed suit, cutting their interest only limits to 50%. New FSA guidance will require greater scrutiny of repayment vehicles such as ISAs and endowments where an interest only mortgage is in place. It is thought that this is encouraging some lenders to reduce availability of these products because of the increased admin burdens of checking the repayment vehicle is in place.
In Europe, interest only mortgage are virtually unique to the UK. Less than a fifth of mortgages are interest only here, but they are a valuable product for those who use them, typically people whose income varies or people starting out on the housing ladder who hope to move and trade up in the near future. Given a repayment mortgage doesn’t seriously eat into the capital until after 10 years of a typical 25 year loan, it is perfectly legitimate to save capital via another means. We need to credit consumers with the intelligence to make an informed choice and I very much regret the demise of this flexible mortgage product. Hurray for the building societies again – Nottingham Building Society comes up trumps with its 80% LTV interest only products. I really believe in the ability of the mutuals to stay connected to their customers and deliver what we need in an individualised and customer focussed way.
My other concern is contagion of this policy to buy to let loans. These will not become regulated by the FSA as was feared a year or so ago. But most landlords take out interest only buy to let products. There are a number of benefits to this. Firstly the interest element is tax deductable. Secondly the monthly mortgage payment is lower, allowing greater cashflow and more money to save up for deposits to buy more properties and thirdly many landlords will hope to sell part of their portfolio to pay off outstanding debts in years to come. So lenders, I beg you not to tamper with interest only on buy to let as it’s a fundamental part of most landlords’ business strategy. With the private rented sector set to become 20% of the UK’s housing stock by 2020, any further funding constraints could have a very detrimental effect on housing availability.
