Interest-only mortgages make a return, A year after they were labelled a "ticking timebomb" by the City regulator, interest-only mortgages are set for a comeback after two leading banks said they would make "low start" deals available to branch customers.
The announcement by the Clydesdale and Yorkshire banks represents the first major revival in interest-only lending after it almost collapsed during the credit crunch.
The two banks – both part of the National Australia Bank group – have launched a range of mortgages that begin on an interest-only basis for the first three years, which would halve monthly payments for some borrowers. The two lenders said they were "the only banks offering this innovative approach as part of their range of mortgage products".
For someone borrowing £250,000, the monthly repayments on the Yorkshire and Clydesdale deals start at just £560, compared with £1,146 on a conventional repayment basis.
The move represents the latest salvo in a mortgage price war which has seen home loan rates tumble to record lows since the government's Funding for Lending scheme was launched a year ago. Two-year fixed-rate deals are now available at rates of below 1.5%, while last month saw Leeds Building Society launch a mortgage with a "zero" interest rate for the first six months – with the interest being added to later payments.
While mortgage brokers were broadly supportive of the Clydesdale and Yorkshire mortgages, some will view the emergence of deals such as these as fresh evidence that the property market is heating up and fuelling the risk of a new housing bubble.
Interest-only mortgages exploded in popularity in the years running up to the credit crunch, making up a third of all new loans granted by banks and building societies in 2007. But with seven in 10 borrowers failing to have a repayment plan in place, the banks were accused of irresponsible lending.
In 2009, the Financial Services Authority (FSA) officially branded interest-only home mortgages as "high-risk", and last year its director, Martin Wheatley, told MPs they were a "ticking timebomb".
In May this year, the FSA's successor body, the Financial Conduct Authority (FCA), revealed that almost half of all people with interest-only mortgages – about 1.3 million homeowners – may not have enough money to pay them off when they mature and face an average shortfall of more than £71,000.
The clampdown, with tighter affordability checks due to take effect in 2014, saw lenders pulling out of interest-only in droves, or introducing much stricter criteria. Those lenders that still offer deals will typically only let people borrow between 50% and 70% of the property's value on this basis, and sometimes impose other requirements too.
Despite the warnings, the FCA has said interest-only loans remain "right for certain people" and has reportedly been concerned that too many lenders have abandoned them. The Clydesdale and Yorkshire banks – which are allowing homebuyers to borrow up to 80% of a home's value – said: "Low start has been designed to meet this specific need within the market for a mortgage which initially offers lower payments, but also provides the peace of mind that the full loan will be paid off over the term." The deals begin on an interest-only basis at a fixed rate for the first three years, automatically converting to capital and interest repayment for the remaining term of the loan, and are available via the banks' 330 branches.
Mortgage brokers said they expected other lenders to re-enter the interest-only market, with one building society understood to be drawing up plans for a five-year interest-only low-start deal.
Ray Boulger of mortgage broker John Charcol said: "Lenders are becoming more comfortable about lending now that the property market has stabilised. We will see more options for interest-only borrowers over the next two years and I'm aware of one lender looking into a five-year deal."
Interest-only deals can make sense for people who want to escape paying high rents, said Boulger. "For younger people, interest-only can be a good alternative to renting. Monthly repayments on a conventional mortgage are likely to be higher than the rent, but on an interest-only they are likely to be less. And in the worst case scenario, if someone takes interest-only and can't afford a repayment vehicle, they may still be better off as over the lifetime of the loan they have paid less than they would have paid in rent, and have had security of tenure during that time."
Post Office Mortgages and Virgin Money are the lenders that come top of the interest-only 'best buy' tables but limit loans to borrowers able to put up a deposit of 30% to 40% of the value of the property. Boulger said that other lenders in the interest-only market, such as Lloyds Bank, are doing very little business because of onerous lending criteria.
Mark Harris, chief executive of mortgage broker SPF Private Clients, welcomed the return of low-start, interest-only deals. "Interest-only mortgages have fallen out of fashion, with many lenders no longer offering them or significantly restricting their criteria. However, for the right borrower who has a considered repayment strategy in place, such as sizeable and regular bonuses, they can be a useful alternative to a capital and interest mortgage.
"Borrowers will benefit from some respite to purchase white goods or enable them to re-establish some savings during the three-year interest-only period, safe in the knowledge that the mortgage will still be repaid in full by the end of the term.
"However, borrowers need to beware of the payment shock after the three-year fixed-rate period ends and they move onto a repayment mortgage. Interest rates may also be rising by then, resulting in a double whammy."
David Hollingworth at mortgage broker London & Country said some borrowers would appreciate the flexibility that such a deal offered. "What it's doing is recognising where people can sensibly use interest-only. I like the structure of it."
The announcement by the Clydesdale and Yorkshire banks represents the first major revival in interest-only lending after it almost collapsed during the credit crunch.
The two banks – both part of the National Australia Bank group – have launched a range of mortgages that begin on an interest-only basis for the first three years, which would halve monthly payments for some borrowers. The two lenders said they were "the only banks offering this innovative approach as part of their range of mortgage products".
For someone borrowing £250,000, the monthly repayments on the Yorkshire and Clydesdale deals start at just £560, compared with £1,146 on a conventional repayment basis.
The move represents the latest salvo in a mortgage price war which has seen home loan rates tumble to record lows since the government's Funding for Lending scheme was launched a year ago. Two-year fixed-rate deals are now available at rates of below 1.5%, while last month saw Leeds Building Society launch a mortgage with a "zero" interest rate for the first six months – with the interest being added to later payments.
While mortgage brokers were broadly supportive of the Clydesdale and Yorkshire mortgages, some will view the emergence of deals such as these as fresh evidence that the property market is heating up and fuelling the risk of a new housing bubble.
Interest-only mortgages exploded in popularity in the years running up to the credit crunch, making up a third of all new loans granted by banks and building societies in 2007. But with seven in 10 borrowers failing to have a repayment plan in place, the banks were accused of irresponsible lending.
In 2009, the Financial Services Authority (FSA) officially branded interest-only home mortgages as "high-risk", and last year its director, Martin Wheatley, told MPs they were a "ticking timebomb".
In May this year, the FSA's successor body, the Financial Conduct Authority (FCA), revealed that almost half of all people with interest-only mortgages – about 1.3 million homeowners – may not have enough money to pay them off when they mature and face an average shortfall of more than £71,000.
The clampdown, with tighter affordability checks due to take effect in 2014, saw lenders pulling out of interest-only in droves, or introducing much stricter criteria. Those lenders that still offer deals will typically only let people borrow between 50% and 70% of the property's value on this basis, and sometimes impose other requirements too.
Despite the warnings, the FCA has said interest-only loans remain "right for certain people" and has reportedly been concerned that too many lenders have abandoned them. The Clydesdale and Yorkshire banks – which are allowing homebuyers to borrow up to 80% of a home's value – said: "Low start has been designed to meet this specific need within the market for a mortgage which initially offers lower payments, but also provides the peace of mind that the full loan will be paid off over the term." The deals begin on an interest-only basis at a fixed rate for the first three years, automatically converting to capital and interest repayment for the remaining term of the loan, and are available via the banks' 330 branches.
Mortgage brokers said they expected other lenders to re-enter the interest-only market, with one building society understood to be drawing up plans for a five-year interest-only low-start deal.
Ray Boulger of mortgage broker John Charcol said: "Lenders are becoming more comfortable about lending now that the property market has stabilised. We will see more options for interest-only borrowers over the next two years and I'm aware of one lender looking into a five-year deal."
Interest-only deals can make sense for people who want to escape paying high rents, said Boulger. "For younger people, interest-only can be a good alternative to renting. Monthly repayments on a conventional mortgage are likely to be higher than the rent, but on an interest-only they are likely to be less. And in the worst case scenario, if someone takes interest-only and can't afford a repayment vehicle, they may still be better off as over the lifetime of the loan they have paid less than they would have paid in rent, and have had security of tenure during that time."
Post Office Mortgages and Virgin Money are the lenders that come top of the interest-only 'best buy' tables but limit loans to borrowers able to put up a deposit of 30% to 40% of the value of the property. Boulger said that other lenders in the interest-only market, such as Lloyds Bank, are doing very little business because of onerous lending criteria.
Mark Harris, chief executive of mortgage broker SPF Private Clients, welcomed the return of low-start, interest-only deals. "Interest-only mortgages have fallen out of fashion, with many lenders no longer offering them or significantly restricting their criteria. However, for the right borrower who has a considered repayment strategy in place, such as sizeable and regular bonuses, they can be a useful alternative to a capital and interest mortgage.
"Borrowers will benefit from some respite to purchase white goods or enable them to re-establish some savings during the three-year interest-only period, safe in the knowledge that the mortgage will still be repaid in full by the end of the term.
"However, borrowers need to beware of the payment shock after the three-year fixed-rate period ends and they move onto a repayment mortgage. Interest rates may also be rising by then, resulting in a double whammy."
David Hollingworth at mortgage broker London & Country said some borrowers would appreciate the flexibility that such a deal offered. "What it's doing is recognising where people can sensibly use interest-only. I like the structure of it."
