The end of interest only mortgages?
If interest only mortgages were completely removed from the marketplace how would this impact the contractor community? This is a question that we as a brokerage are being asked often by lenders? If this question was posed two years ago the answer would be that we would only be able to help half of our clients as 50% of them took the interest only option. Today however, the answer is very different as it would only impact about 10% of our clients.
So why did so many contractors take interest only mortgages? I would suggest this would be down to the fact that contractors like flexibility and like most of us if they can minimise their expenditure then this is their preferred option. In reality many contractors can and should take a repayment mortgage. Many contractors start the conversation regarding their mortgage options on the basis that they hold or can have access to large capital sums and therefore like the idea of an offset mortgage. However, once they have been educated regarding these products and a cost benefit analysis taken place, many do not opt for this option as they are unlikely to see the full financial benefits of such a mortgage product. A strong analogy can be made with regards to interest only mortgages. As an industry I believe we should have been stronger with clients and took more time to persuade and/or educate them.
About two years ago we as a business changed our processes and when we spoke with our clients who were adamant that they wanted an interest only mortgage we supplied them with a repayment illustration as well. This then lead to a behavioural change and to a large extent we have helped to condition the contractor marketplace in terms of their thinking when it comes to mortgages. The benefits this has had for us as a business is that we have not been adversely affected like many brokers who are constantly complaining about the Mortgage Market Review, the Financial Services Auroirty and Lenders.
Do I think the pendulum has swung too far? Of course, but this was to be expected due to Credit Crunch, Recession and systemic flaws in the world economies’. As an industry I believe there is an opportunity for the design of a new interest only mortgage. If we take a contractor or any individual that holds a mortgage can the industry design a product where a client can switch to an interest only option on certain events happening? For example, a contractor takes out a mortgage on a repayment basis, and then their contract comes to an end but he or she cannot find another suitable contract immediately. In this situation could it not be feasible that they could switch their mortgage from a repayment mortgage to an interest only automatically. There would need to be some governance in terms of when and how often this could happen and for how long. However, by designing such a product this would surely help the client by providing them with flexibility when most required. From an industry perspective this in my opinion would reduce costs in managing a mortgage book and provide lenders with significant cost savings.
Whilst many lenders are stipulating that they still offer interest only mortgages, in truth these are being reserved for a very niche part of the population, however once the dust settles I’m confident that interest only will return. However, I do hope that the industry will be more inventive moving forward so as to avoid the problems of the past but also to look at ways not to preclude new borrowers to the market.
How can lenders be more inventive?
We are getting data all the time that the average age of a person in the UK is between 34 and 37 compared to it being mid 20’s back in the seventies. We are also told by the government that we will be working for longer as they increase the state retirement age. Yet our mortgage has to be paid off at the age of 65. Why? If we look at our clients the majority are in control of their own destinies and many contractors tell me that they see themselves working well beyond 65. In addition, some will take extended time out of contracting. Many do this when they have a family, so why not allow them to go on onto an interest only when this happens? Why not let them go on an interest only for the first two years of the mortgage then automatically switch them to repayment but do the affordability assessment up front on a repayment basis?
I believe there are many circumstances that warrant an interest only but it should not be one size fits all regardless of circumstance.
Article by: Taj Kang, Associate Director at Contractor Mortgages Made Easy
Media Contact: Raman Kaur, Public Relations Manager.
Tel: 0844 44 88 800
Email: media@contractormortgagesuk.com
