It expressed concern over stretched incomes, increasing house prices and the number of consumers taking out mortgages over extended terms – some up to 50 years – and opting for interest only repayments. It also criticised lenders for continuing to increase income multiples and relax terms, which could lull consumers into a false sense of security. Is the continued and much-publicised concern over interest only mortgages valid?
Paul Hunt, head of marketing, Platform:
“All our business is done through brokers and we’re confident they are giving consumers the right advice in terms of their mortgage options. However, there is always a concern with interest only mortgages and people do sometimes think the capital increase will offset the mortgage, which isn’t the case. They need to be aware of the fact that they are not repaying the capital on the loan and that they need a repayment vehicle in place. However, lifestyle choices mean more people want to buy their own home and as long as they have given consideration to their decision and sought financial advice, then interest only mortgages can provide this option.”
Jonathan Burridge, managing director, Quantum Mortgage Brokers:
“Interest only mortgages are right for some people, but by no means all. The crucial thing is people must understand what they are getting into and that only paying the interest means the outstanding debt still needs to be paid, either at the end of the loan or when the property is sold. Interest only mortgages are very useful for first-time buyers who have problems with affordability or for people wanting to get a foot on the property ladder where the market is competitive and prices are rising quickly. However, anyone with an interest only mortgage should review their situation regularly to assess whether it is still appropriate.”
Harry Katz, IFA, Norwest Consultants:
“Interest only mortgages are a daft idea. I cannot comprehend why brokers would allow their client to take out an interest only mortgage. It is only the financially illiterate that do this. People are under the impression that they will live in a house that will triple in value and they will sell it and all will be fine. That is nonsense. If people can’t put down a 10 per cent deposit and take out a captial repayment mortgage, they shouldn’t even consider trying to get onto the property ladder. Brokers who advise their clients to do this are in breach of a duty of care by allowing them to be stupid. Just because they want to be stupid doesn’t mean they should be allowed to be. There is a daft notion that renting is bad, but it isn’t. It is certainly preferable to taking out an interest-only mortgage.”
Tim Hughes, head of intermediary markets, Nationwide BS:
“For many first-time buyers, interest only mortgages are seen as a way of keeping initial monthly payments low. However, both lenders and brokers need to ensure borrowers have a repayment vehicle in place to pay back the capital of their mortgage and that borrowers realise that although low monthly payments are welcome when first getting onto the housing ladder, the long-term consequences of paying a mortgage on an interest-only basis, without a repayment vehicle in place, need to be considered.
We started writing to our interest-only customers in December 2005 to ensure they had repayment vehicles in place.”
