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Lenders offer updated interest-only mortgages.

Byline: Trevor Law

INTEREST.ONLY mortgages have a dented reputation after falling foul of the 2007/8 financial crisis.

The hangover remains, with many of those who took them out at risk of losing their homes.

But lessons have been learned by the industry and the products are back in a new guise.

Essentially, an interest-only mortgage allows clients to benefit from lower monthly outlays when compared to standard repayment mortgages so long as other means of meeting the capital cost are in place as the loan will still be outstanding at the end of the term.

Once they represented a third of the market but fell out of favour when first endowment policies, sold as repayment vehicles alongside them, saw returns deteriorate and then the big crash sent house prices tumbling - raising the spectre of negative equity whereby the debt ends up greater than the home's value.

A general decline in interest-only mortgages followed, albeit such deals remained the norm for buy-to-let borrowers, with the Council of Mortgage Lenders arguing that the method minimised costs for landlords and were more likely to produce a profitable margin.

Recently increased demand and improved competition between lenders has seen a more widespread return subject to certain conditions.

Loan-to-value restrictions and minimum levels of available equity and income are all now commonplace in the market, with the existence of a suitable repayment vehicle being essential.

A pick of lenders that currently offer interest-only mortgages include Barclays, Santander, RBS, Virgin Money, Clydesdale Bank and the Leeds, Nottingham and Darlington building societies.

So, who fits the profile for interest-only mortgages? In general, it is those whose income tends to be non-standard or lump sum based - where they receive little to no salary monthly with larger lump sums being received throughout the year.

This suits their lifestyle as they can pay the monthly minimum that is required to meet the interest on the outstanding loan with the capital being reduced through large capital repayments when these are available.

Examples of the type of householder with this lifestyle are company directors who get paid a low salary and annual substantial dividend, the self-employed who may not receive a regular income and the employed who receive large bonuses.

Others who may be suitable are those who are expecting big cash sums at some point along the way and have no immediate need to repay the capital on a monthly basis.

For example, people with large pensions who have access to a hefty tax-free lump sum, and others with investments such as stocks and shares or endowments expected to vest at a set date in the future.

Equally it could attract purchasers of large and often high-value properties who eventually plan selling up and downsizing to a cheaper, smaller and more manageable home.

Interest-only mortgages are suitable for these kinds of people as it frees up their monthly expenditure. Not every lender caters to this situation, however, and there are often both minimum income and/or minimum equity restrictions alongside feasibility checks to ensure that downsizing is practicable.

Interest-only mortgages often cost more in interest over the full term and are not right for anyone without a suitable repayment plan or wanting certainty.

It is essential that the mortgage is set up in the correct way and for the right reasons.

Residential borrowers now face tough questions on their income and spending to assess their affordability and if they can cope in the event of interest rates rising. So, get advice from a broker to ensure it meets your short-term and long-term needs.

Trevor Law is managing director of Merito Financial Services, chartered financial planners, based in Solihull.
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:Nov 24, 2016
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