The undertaker has had the measurements for the coffin to be occupied by Interest Only for some time now and has carefully carved a comfortable case for it to finally lay it’s head. However, despite a few Pythonesque “late parrot” moments it has not, as yet at least, “ceased to be”.
"Ello Polly"
Until yesterday we seemed to have reached a relatively comfortable “just resting” state, but then Nationwide calmly stepped up and firmly placed the first nail in the lid.
Despite their claims to the contrary, this is a massive step for Nationwide to take and it could well have a big effect on other lenders who have been monitoring this sector of the market closely. Whilst we can sympathise with the reasons behind such a move; small share of business, FSA pressure, etc., I cannot help thinking that this is an over-reaction to a shrinking section of the market where sensible changes have already taken place.
As with anything, when faced with potential new regulation or post-crises there is often an over-reaction and the pendulum swings too far in the other direction before settling back to a sensible middle ground.
Unfortunately too many people have used interest only in the past as a way of making sure they can actually afford the mortgage in the first place and deferred worrying about how they are going to pay it back. It was never really right that someone could borrow 90% LTV and say they will pay the loan back by selling a property that could depreciate in value in a few years time.
It is not however, just the lender who should take the blame. They are free to follow any policies they please as any business is, but I am sure that the FSA have a major role to play in this too.
Whilst they may talk a good game publicly, stating that interest only is up to the lenders and they are relatively comfortable with it, (there is no ban on it after all in the Mortgage Market Review document), it strikes me that a much harder approach is being used once they are actually inside a lender.
Also, if they are insisting that lenders need to check the viability of repayment vehicles at least once when the mortgage is in force this creates other issues. Do lenders have the staff, training and expertise to actually do this properly? There is definitely a cost barrier here as well.
All of this creates uncertainty within lenders and at least Nationwide have taken a brave decision, whether or not we think it is the right one.
It should also be remembered that existing Nationwide clients will not be penalised, so they can product switch with Nationwide at least without issues.
The worry is not so much the Nationwide itself, but the knock on effect of other lenders who may currently be comfortable with their policies and levels of interest only business, but because of a shrinking market see these levels increase above a tolerable level.
With Interest Only now very much consigned to the niche product area, those who will be hit the most are existing interest only borrowers who are seeing their remortgage options disappear before their eyes.
I hope this does not prove to be the final nail in the coffin for mainstream interest only mortgages as there is still very much a place for such a product, not just for those with existing repayment vehicles, but especially amongst higher net worth borrowers where this is a very plausible and sensible method of repaying a mortgage.
For the time being at least, interest only could well just become the preserve of the Private Banking arena or niche lenders who charge accordingly for the privilege.
Whether or not we will all be saying that Interest Only has “kicked the bucket, shuffled off this mortal coil, run down the curtain and joined the bleedin’ choir invisibile” remains to be seen. But for Nationwide however at least, this really is an ex-product!
