Here’s a question: why are interest-only mortgages so bad for someone living in a house when you could compare it to a buy-to-let loan with a long term tenant?
Answer? It occurs to me that the whole interest-only debate is rather more political than it seems.
The Mortgage Market Review has clamped down on interest-only mortgages for consumers and whether or not the Financial Services Authority intended it, lenders have pre-emptively tightened the screws on the product.
Criteria are now so restricted that it’s virtually not available.
While in theory assessing any interest-only application on a capital repayment basis makes good sense it precludes the opportunity to use your primary residence as an investment.
It “protects” some consumers from over-stretching themselves yet it also prevents some more financially savvy consumers from choosing to take a risk for a reward.
In the past week I’ve heard several people refer to the authorities’ desire to return to a housing market that is about “nesting not investing”.
Homeownership instead of access to the housing market.
In other words consumers can no longer choose to take a punt on house prices with their own home.
While this shift might have the effect of curbing house price booms the real driving factor behind the housing market overheating is a lack of supply.
To use that as an excuse to prevent many people’s dreams of improving their financial circumstances is convenient.
It is also the philosophical argument of survival of the majority at the expense of the few.
It is inherently a left wing philosophy. It affords people the freedom to do a lot of things but takes away the freedom from inhibitors that prevent them doing as they personally see fit.
In a “free” society that encourages entrepreneurialism it is an unusual stance to take.
It also seems ridiculous to suggest that interest-only loans are not good business for the mortgage lender.
My logic may be flawed but it seems to me that an interest-only buy-to-let loan is given at a slightly higher rate than a residential loan and assessed on a rental income ratio.
If a consumer chooses to be his own tenant surely the risk of void periods and damage to the property is less than with some random tenant with a tenure of six months?
If his income is assessed and it covers the payments why can’t he be his own tenant and treat his home as an investment?
Risk is clearly a commercial factor and lenders should be able to protect themselves by charging a more commercial rate to consumers who choose to take this risk.
I heard one interesting suggestion from the head of lending of one large mortgage lender earlier this week.
Why not have two tiers of regulatory consumer protection? If you are worried you’ll be taken advantage of then sign up to full protection.
If you want to use your savings to access the housing market and invest while you nest then sign up to less comprehensive protection.
As it stands interest-only mortgages look likely to be a legacy product only.
For a society that prides itself on aspiration, that would be a shame.
