With interest only mortgages becoming much harder to obtain over the last few years, and more recently the Nationwide Building Society announcing they are no longer going to offer interest only mortgages to new borrowers, it is time to have a good think about how good they really were, and if we should miss them when they do disappear.
Interest only is a great tool for the right people. For example, if you are a buy to let property investor, looking to grow your portfolio, interest only allows you to save money for deposits quicker whilst utilising tax relief advantages. Another example is somebody who expects their income to rise sharply, allowing them to get on the property ladder quickly and with low monthly mortgage payments, then worry about paying the loan back once they start earning more. Then there are those who already have endowment policies, which are on target to meet a certain figure, and they expect it will pay off the capital from their mortgage at the maturity date.
Unfortunately, because of human nature, we have taken advantage of this product and we have used it for reasons which are not suitable, and by doing so, have ruined it for the ones who would. An Example of this is using interest only so that you can have a higher standard of living than you should, and although you may have always intended to revert to repayment one day, you haven’t, and you get into a cycle of borrowing more and more this way, until the time we are in now when the lenders are saying no. If this sounds like you, then you need to have a look at your situation immediately and look to stop the rot. That may sound a little extreme, but if you don’t sort it out now, you will find it much harder in the future. The fact is, lenders are throwing elderly people out of the homes they have lived in for 40 years, because interest only cannot last forever, and the lenders want the capital back like had been promised.
Another example of interest only being a burden to society, is when people don’t consider the alternatives. You must make sure you talk to a competent adviser when taking out an interest only loan, so they can talk to you about the alternatives. For example, if you came and asked for an interest only mortgage, and you didn’t have a suitable repayment vehicle in place, you would be heavily restricted to the lender you could turn towards. The best interest only rate you could get may be say 4%, giving you payments of £333 on a £100,000 mortgage. If you then consider the alternative and opt for a 35 year repayment mortgage instead, you may be able to get a deal which is at a lower interest rate of say, for example 2.5%, making the payments £358. So for the sake of paying £25 a month extra, you are making sure that £100,000 is paid off at the end of the term. In this rough example, over the term that’s an extra £10,500 in monthly payments, equating to £100,000 saved by the end of the 35 years, and there is no repayment vehicle in the world you will find better than that.
So, it’s the start of the end for interest only mortgage, and for some people it’s a shame they cannot take advantage of it, however for the country on the whole I think it’s a blessing, and something that, if done 50 years ago, would mean we be in a much better position today.
Kieron Bassett Financial Services has two Independent Financial Advisers who specialise in mortgages and investment advice. Contact us on (01524) 832057, via e-mail, info@kieronbassett.com, or visit www.kieronbassett.com.
Jason Hinde DipPFS
29th October 2012
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