The world may be celebrating the return of the first time buyer in the latest mortgage data from the Council of Mortgage Lenders. However, many have missed that lurking within the report is the death of a vital part of the mortgage business.
Needless worry and regulatory meddling is killing off a vital tool for today's homebuyer. So what is this tragic casualty?
Interest-onlyInterest-only mortgages have dropped dramatically as a proportion of all mortgages. Now, they make up just 3% of all first time buyer mortgages, 11% of all mortgages for house purchase and 23% of all remortgages. This compares to five years ago, when 32% of all mortgages were interest-only. A spokeswoman said: "The number is decreasing, and has been doing so since around 2006-2007."
Supply dries upThe trends are a result largely of a demise in this section of the market. Adrian Knott, director of independent mortgage broker, Adrian Knott Partnership, says:"I see no end of clients who are ready and willing to buy, but who, due to their circumstances, want to transact on an interest-only basis. The shrinking pool of loans and lower LTVs makes this all but impossible."
TighteningKnott says the issue is often that it is wrongly associated with irresponsible debt. There is an idea that people get an interest-only mortgage without understanding how they work, purely because it's cheaper than a repayment mortgage. They then are in for a big surprise at the end of the mortgage term when they still owe the full value of the mortgage and have no way to pay it back.
Ray Boulger of independent mortgage adviser John Charcol says the result has been a tightening of criteria: "Lloyds Banking Group's recent major policy announcement on changes in its interest only mortgage criteria followed similar tightening by Barclays/Woolwich and Santander." The changes have all been different, but all assume less growth than before on investments set up to repay the debt, and Barclays/Woolwich insists on assuming ISAs will not grow at all over the period of the mortgage.
"These interest only criteria changes are being driven by the draft Mortgage Market Review (MMR) published by the Financial Services Authority in December. The FSA has said it wants to consult further on interest only mortgages and the current consultation period runs until 30 March. As drafted the MMR puts so much responsibility on lenders to make sure any investment plan will produce sufficient funds to pay off the mortgage that lenders are understandably not prepared to take the risk of being sued by borrowers for any shortfall.
"The FSA admits that interest only mortgages are suitable for a significant minority of borrowers but its current proposals will deny many of these borrowers this option. "
Useful toolIn fact, Knott adds, for many people, after doing proper investigations and understanding both the product and their needs, it can be the best option. He explains: "For many people, who have assets to repay debt, a high disposable income, or a history of large bonuses, interest-only mortgages can be the right product. And these people fully understand the risks. By taking the axe to interest-only loans, lenders are cutting off their noses to spite their face."
Likewise, there are those who would rather take out an interest only mortgage and then overpay at the level of a repayment mortgage - in order to give themselves added flexibility if their circumstances should change or interest rates rise unexpectedly.
And while this is bad enough for individuals, Knott argues that it is also taking away sales opportunities. He says: "One factor that is genuinely damaging the property market is the rapid demise of the interest-only loan. Transactions that should take place don't take place. And it all adds up."