Another Nail In The Housing Coffin!
The credit crunch is hitting property sales and prices. Now interest-only mortgages are under threat...
What can you do if you find the house of your dreams, only to discover that you can't stretch to the mortgage that goes with it? One obvious answer is to make an offer below the seller's asking price. Indeed, according to property-information firm Hometrack, current sales are completing at around a tenth (10%) below asking prices.
Another option is to shop around for a mortgage which better suits your needs. For example, depending on your personal circumstances, some banks and building societies will lend you more than others. In addition, it makes sense to track down the cheapest mortgages available, taking into account both monthly repayments and any associated fees. The best way to do this is by using a whole-of-market broker, such as The Fool's award-winning, no-fee mortgage service.
Interest-only loans are cheaper
With a repayment mortgage, your monthly repayments consist of interest and repayment of capital. Thus, they chip away at your home loan, leaving you debt-free at the end of your mortgage. However, with an interest-only loan, you pay only the monthly interest on your mortgage, so your debt remains constant.
Therefore, a sure-fire way to bring down your monthly repayments is to opt for an interest-only mortgage. During the UK's twelve-year housing boom, mortgage lenders were only too happy to provide interest-only loans to homebuyers. After all, with house prices rising year after year after year, even customers with interest-only loans of 100% of the purchase price soon built up substantial equity in their home.
The tide has turned
Of course, interest-only mortgages present more risk to mortgage lenders. Without a proper repayment vehicle in place, homeowners have no clear way of paying off the debt when their mortgage expires, other than selling up and moving to a cheaper property. Nevertheless, in the boom years, mortgage lenders were happy to ignore this extra risk and lend on the same terms for both interest-only and repayment mortgages.
However, with the property market at the beginning of what may well be a prolonged slump, mortgage lenders are rediscovering the basics of risk management. These days, they are unwilling to lend five, six or even seven times an applicant's income. Likewise, they are demanding higher deposits from homebuyers, and paying closer attention to the affordability of mortgage repayments.
Thus, faced with the possibility of negative equity (when the value of a mortgage is larger than that of the property on which it is secured), lenders are being stricter when it comes to handing out interest-only loans. In response to fears about borrowers' future ability to repay, some lenders are:
- carrying out more in-depth credit checks on applicants;
- reducing the amount they are willing to lend on interest-only loans; and
- asking borrowers to supply documentary evidence of a capital-repayment vehicle.
A week ago, Barclays subsidiary Woolwich lowered its cap on interest-only borrowing to three-quarters (75%) of a property's value. Borrowing in excess of this loan-to-value (LTV) level must be accompanied by capital repayments. What's more, leading lender Abbey now restricts lending on interest-only terms to just half (50%) of the purchase price. Likewise, Intelligent Finance -- owned by number-one mortgage lender HBOS -- limits its LTV for interest-only borrowers to three-fifths (60%).
From easy credit to tough debt
Clearly, when it comes to lending money against residential property, lenders have cleaned up their act and tightened their criteria. Indeed, some brokers claim that this tightening is leading to more mortgage applications being rejected than at any time since the early Nineties. Thus, when it comes to lending to customers on the margins of affordability, lenders are now erring on the side of caution and delving deeper into customers' personal finances. Today, their motto is: "If in doubt, shoo them out!"
Finally, I should say that I am not opposed in principle to interest-only mortgages. Indeed, while a homeowner between 1992 and 2005, I had an interest-only loan. However, I set up several different stock-market investment plans aimed at paying off my mortgage as soon as possible. I would urge other interest-only borrowers to do the same (or to repay lumps of capital as and when they can, for example, by using annual bonuses). Otherwise, they may not be in a position to repay their debt when their mortgage ends, which would be a nightmare!
More: Find a happier home loan today! | How To Find The Cheapest Mortgage | House Prices Fall By A Tenth
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ChasBMW is correct: all other things being equal, private buyers should normally be able to outbid professional investors - who want to make a profit after covering their costs. But interest-only mortgages (considered too risky for most private buyers) have preserved a tax advantage for BTL investors that was abolished many years ago for private buyers. Far from being bad for the housing market, their demise will help create a level playing field, and can only help the average first-time buyer.
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May I make a suggestion to avoid these so called UK high street mortgage lenders sucking you dry. [br/][br/]Try an international(Europe) based lender that gives loans in the UK. They are much much cheaper and do not employ blood sucking tactics.[br/][br/]Save your blood(finances), we will need them before things start to look up again.
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@ Meagherp[br/][br/]using a SIPP is unlikely to be suitable as [br/]1)you cant withdraw until age 50/55 depending when you do it [br/]2) the cash released is still only 25% of the fund, so you would need a fund 4 times the value of the outstanding mortgage to repay it [br/]3) once you have carried out point 2 successfully, you are left without a retirement lump sum fund and everything you have spent years saving for and only left with a what is likely to be an insufficent monthly income by way of drawdown or annuity[br/][br/]normally you would use the fund to pay one off expensesd, clear any lingering debt that may or may not still exist, and use the remaining funds to supplement income by way of annual interest[br/][br/]ISA's can be used, and if you are lucky enough to be in the police you can still but guaranteed, albeit expensive endowments...[br/][br/]at the moment some interest rates are so high that they are better value than an ISA even after tax (if you are a basic rate payer)
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03 September 2008