Over the last few years, indeed since the mortgage crash of 2008, the idea of securing an interest only mortgage or a 100% mortgage has never crossed the minds of many lenders or borrowers. As UK mortgage providers continue to reduce the risk to capital it had been assumed that interest only mortgages and 100% mortgages were a thing of the past. However, recent research suggests they are making a comeback!
Is this a sign of a buoyant housing market?
While there is certainly competition in the UK mortgage market we have seen a reduction in the number of buyers as investors await the outcome of Brexit negotiations. So, the idea that interest only mortgages and 100% mortgages are now readily available seems very much at odds with market demand. It may be that mortgage companies are struggling to fill their lending books and offering an interest only mortgage may well attract more business. However, as we know from past experience, this can lead to significant risks further down the line!
Interest only mortgages
It would appear there are now in excess of 190 interest only products available in the UK mortgage market today. This compares to 102 just six years ago and would seem to indicate an increase in riskier mortgage arrangements. Indeed, if as estimated, one in five UK mortgages is interest only then this equates to 1.7 million mortgages with a combined value of £250 billion. This is a serious problem!
We know that interest only mortgage clients are required to have investment/savings plans in place to repay the initial capital at the end of the term. However, when you consider that UK base rates are 0.75% (with some savings accounts offering zero interest) there is limited scope for risk free reinvestment. So, where would interest only mortgage holders find the funds to repay capital at the end of the mortgage term?
Many people will be astounded to learn that there are 100% mortgages available in England and Wales to purchase property up to a value of £500,000. While many of these will offer a “teaser rate” of around 2.99% for the first three years, it is the increase after the teaser rate is over that can be catastrophic. We have seen examples of some headline interest rates increasing by nearly 14% pushing monthly payments up by a staggering £296.
There are some companies such as Lloyds which offer a 100% mortgage on the proviso that a family member is willing to place 10% of the mortgage value in a Lloyds bank savings account for the full term. This is very similar to the assets under management arrangements often negotiated by private banks which create an insurance policy.
Where are the regulators?
Under current regulations, all mortgage applications must undergo an affordability calculation although there are ways and means of expanding the number of income streams and assets which can be taken into consideration. It will be interesting to see how the regulators respond to the increase in interest only mortgages and 100% mortgages. Will they clampdown further? Will they turn a blind eye? Could those mortgage lenders taking a more risky approach to the UK property market regret loosening their purse strings?