Maintaining an interestPosted on: 08 October 2015 by Steve Wanless
Steve Wanless debunks some of the scaremongering around interest-only mortages.
The statistics suggest that we are enjoying our new pension’s freedom; many prefer the word “revolution” as individuals enjoy a measure of choice long denied to them.
Despite warnings to the contrary, new pensioners are not losing the plot and gambling the twilight years on a spin of the roulette wheel or the turn of a card.
The main threats to their pension pot since the new regulations came into force in April seem to be either their provider restricting access to their funds or the fraudulent activity of scammers trying to access those funds.
While pensions come into sharper focus the older we get, the property bug is one we get early, and never really lose. Once we get on that property ladder, nothing is going to entice us to get off.
It has become a national obsession. Pick up any newspaper, listen to the radio, watch TV or go online – and there will be something about house prices, a property bubble or a property shortage.
No shortage of scaremongering
It was rash mortgage lending that led to the banking crisis and financial collapse of 2008 and the recession that followed is still with us. Yet house prices continue their relentless rise; those who have kept a roof over their heads are unlikely to have lost out.
Yet the scaremongers are out in force again, despite predictions of around 5% annual increases, taking the average price of a house in the UK by 2020 to £360,000.
Recently, the chief economist of the Council of Mortgage Lenders (CML) described the UK housing market as “dysfunctional” – while Citizens Advice claim nearly a million homeowners “face difficulties” because they have no way of paying off their mortgages.
They are the owners with “interest-only” mortgages. The Citizens Advice said 934,000 borrowers have no plan about how to pay off the loan at the end of its term. That figure is higher than previous estimates from lenders and the Financial Conduct Authority (FCA).
“Interest-only” mortgages are attractive because there are no repayment costs; this perhaps allows the borrower to purchase a more expensive property than a repayment mortgage would allow.
“Interest-only” mortgages are not necessarily a recipe for danger or disaster. Many borrowers, with the advice of an Independent Financial Adviser (IFA), put adequate repayment plans in place with investment savings such as ISAs and pensions.
Increased property value
On top of that, the value of the property is likely to have increased substantially over the period of the loan. Giving the homeowner the choice of paying off some or all of the mortgage, or downsizing with cash to spare to enjoy a better standard of living or to pass on as a house deposit to the next generation.
A recent study showed that during the Coalition period – 2010-2015, a period of “austerity” - the number of millionaires in the UK shot up by 41%, in large part to the increase in the value of property.
According to the Office of National Statistics (ONS) property prices have increased on average by a third in those five years.
Owners might not be moving, but they are re-mortgaging in record numbers to get their hands on some of that equity. The typical re-mortgage loan reached £170,000 for the first time in July with applications up by over a third on the year.
Experts are predicting three periods when this “interest-only” glut will cause problems. The first is 2017-18 when the endowment mortgages sold in the 1990s reach their peak of maturing.
Problem period two will come in 2027-28 when the “interest-only” mortgages taken out in the early 2000s come to the end of their term.
The final peak will come in 2032, as the 25-year “interest-only” mortgages lent with little checking just before the credit crunch, finish. Those are the ones that could potentially cause the most problem for the borrowers, although they may well have built up a large amount of equity by then.
Incredibly, just a year after the Mortgage Market Review (MMR) came into force and most lenders withdrew them, “interest-only” mortgages are making a comeback. The number of “interest-only” products had doubled since 2013.
Barclays, Santander and Leeds Building Society have all relaxed their rules, as well as scrapping requirements that borrowers must have investments in place to pay off the loans at the end of the term.
But the crucial difference between today and 2007 is that lenders are not advancing 115% loans, or even 100% ones. Lenders will advance up to 75%, with 25% of the loan on a repayment basis – sensible lending for sensible customers.
Another positive move is that the FCA is to examine the problems facing Britain’s ageing population, many of whom are “asset-rich and cash poor.” The MMR did nothing to resolve this problem and in fact left many trapped in their valuable homes.
“The average pension pot is £30,000, yet a significant number own property assets of around seven times that number or more,” revealed Christopher Woolard, the FCA’s director of strategy and competition.
“The ability to access some of that asset, as a restricted lump sum or as a gradual income, could make a significant difference to people’s lives.
“No one wants to return to the unaffordable lending practices of the past, where almost every application was approved. However, we do have to remain sensitive to the impact of these reforms over the long run.”
Perhaps the property revolution is coming. For that to happen, the government needs to give owners some incentive to downsize, freeing-up much needed stock for the younger generations. Making “equity-release” products more financially attractive and user friendly would be a start!
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