Clearly before the recession interest only was horribly abused – clients who really should have been on repayment (or not bought at all) were out on interest only to help with affordability, but with no plan apart from the hope that the property will continue to increase in value before selling it. And we all know how that worked out.
Therefore interest only was one of the first areas of criteria that was tightened up, and clients were asked to prove a viable repayment strategy. Previously a repayment strategy had been sale of the mortgaged property at any loan to value – this was reigned in and many lenders applied a maximum loan to value on sale of property, and over the last four years this has become tighter and tighter. Now, for those few lenders who still offer interest only with sale of the property the maximum loan has to be set at 50% of the value of the house. Not only this but often a lender will either apply a minimum income (usually £75,000 or above) or a minimum loan amount, which at present sits at £300,000. Therefore for most clients if they want an element of interest only without a formal repayment strategy then they will need to have a house valued at £600,000, and a loan of £300,000. Clearly this shows that many lenders only want to offer interest only to medium to high net worth clients, so you would hope that for most of you in Fulham, Parsons Green and Notting Hill you should be quite well placed for this. There are exceptions to the above, especially with some of the smaller, bespoke lenders, but most of the high street banks have moved away from providing interest only with sale of the mortgaged property.
Back in the heydays you could purchase a property with as little as your solicitors fees and stamp duty cost. That worked fine when prices were rising but was a disaster for everyone during the crunch of ‘08. These days it costs a lot more hard cash up front to pick up the keys.
But what else constitutes an acceptable repayment strategy if you do not have the required equity, or you do not want to borrow £300,000? Traditionally investments have been used, and lenders will still consider these. But whereas in the past most banks and building societies would take a projection on an investment plan or endowment policy increasing numbers are now just looking at the current value – fine if you are towards the end of your mortgage life and you have built up capital elsewhere – not so good if you are just starting out.
And what about pensions? Well some lenders will still take them, but currently they are still restricting the lump sum provision to 25%, despite the changes that will take place over the next year. Some lenders will work off a projection for a pension, and then take 25% of that projected value; however there are a number who base it upon the value of the pension at the time of application.
If a client has large bonuses then we maybe able to place the case using bullet payments; you make the monthly interest only payments, and then once a year a lump sum goes in to reduce the mortgage. But realistically you need to have a track record of bonuses for the last three years ,and confidence that they will continue because if you miss a lump sum payment your lender will switch you onto full repayment immediately.
Finally we can use sale of background properties; so if you have a buy to let portfolio or a holiday home then we can use the equity in that with some lenders.
Effectively lenders have removed the option for interest only unless you have enough equity in your home (or other houses) to cover the mortgage, or substantial assets to be able to repay the loan, both of which, I believe, are eminently sensible.
As a client if you want interest only there has to be a good reason for it. If you want to protect your lifestyle by reducing your outgoings, but you can afford full capital repayment then I think that is acceptable (as long as you have a repayment strategy); if you can only afford the mortgage on interest only maybe you should consider borrowing less, as it may not be sustainable. Part of my job as a mortgage broker is to assess whether you are suitable for interest only or not, to make sure that you have a viable and sensible plan to pay off what you owe. And if interest only is suitable and right for you then because of the strong relationships that John Charcol has built up with high street and bespoke lenders I will be able to find the appropriate product for your situation.
Mortgage Consultant, John Charcol
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