Liz Phillips: Another nail in the coffin of interest-only mortgages.
One more lender has chosen to abandon
interest-only mortgages, which continue to turn into a niche product as
consumer demand falls.
Coventry Building Society is just the latest lender to stop offering
interest-only mortgages to new homebuyers. Anyone with this type of mortgage
needs to be seriously worried.
The building society joins Royal Bank of Scotland and NatWest which this week pulled
the plug on interest-only following a similar move by Nationwide last month.
Even those which still offer them are tightening up their conditions making
them far harder to get.
They include the giant Lloyds Banking Group, which has Halifax, Bank of Scotland
and Cheltenham & Gloucester under its wing and Clydesdale Bank. Together,
these banks and building societies represent nearly half of the UK's lenders.
But that's not all. ING Direct, Leeds and Newcastle building societies will
only advance 50% of the purchase price on interest-only, according to Mel Bien
of Bien Media.
And many of them will not allow homebuyers to say they will repay the capital
through the sale of their property. They have to show they can repay it through
savings and investments instead.
Lenders are acting ahead of City regulator the Financial Services Authority
making interest-only borrowers prove how they will repay the capital in 2014.
The FSA has called these mortgages a "ticking time bomb", with
two-thirds of those already in existence due to mature after 2020.
Lenders say these once popular mortgages now represent less than 5% of their
applicants and their trade body, the Council of Mortgage Lenders, says only 2%
of first-time buyers take one out.
But trying to minimise the impact by talking about new borrowers is masking the
real problem - existing interest-only borrowers.
If they're with one of the lenders which have pulled out of the market or put
in restrictive conditions then they're going to find it impossible to trade up
to a bigger home. Even if they can take their existing mortgage with them, they
won't be able to borrow more.
And switching to another lender prepared to advance a home loan on this basis
is going to be difficult. More mortgage companies are going to drop out of the
market, so those that are left can ramp up their interest rates as the
competition falls away.
Once that happens the money they save on their repayments can't be ploughed
back in to chipping away at the capital as they'll have less spare cash to go
around.
The attraction of interest-only mortgages is obvious. On the whole monthly
repayments are a massive 40% less than on a repayment mortgage. Take a £165,000
mortgage with an interest rate of 4%. On a 25-year repayment mortgage the
monthly bill is £880, whereas on an interest-only basis it's merely £550.
Only the other day on Twitter, I saw someone saying they hadn't realised they
weren't repaying any of the original loan on their interest-only mortgage! It's
mind boggling to think people can be so deluded. Unlike many financial
products, this one does what it says on the tin.
If you're only repaying the interest then there's no way you're paying off any
of the capital. It's time to face up to the hard facts if you're on an
interest-only deal. Either grab one of the excellent cheap repayment mortgages
around now or split your mortgage and move at least part of it to a repayment
type.
