Thursday, 9 August 2012

Interest only?

In the last year or so Interest only mortgages have become harder and harder to acquire as lenders require un-realistic proof or just will not consider this option. So why has this come about?
The UK financial regulator has been consulting on mortgages in light of the worlds financial melt down that was originally attributed to the sub-prime mortgage market and the impact this has had on the UK Market. The outcome of this consultation is something called the Mortgage Market Review (MMR) which is changing the goal posts for lenders and mortgage facilitators alike.

Rather than having prescriptive rules to follow the FSA create guidance that the providers of Mortgages have to interpret. Now if their interpretations are wrong then the FSA has the power to fine the Banks/lending providers. 

This ultimately has left the financial institutions involved running scared. Instead of objective, sensible decisions each has followed the others lead taking Interest only off the menu or making it very hard to obtain. Only a few providers will consider interest only now and typically this is at a low loan to value (low mortgage compared to the value of your house).

So why do we care?  Well personally I believe flexibility in the mortgage market is imperative. I personally left University and bought a house immediately with my parents help. This was taken on an interest only basis as I was on a graduate scheme and my starting salary was low. As I earned more I turn my mortgage to a capital & Interest mortgage (Repayment) and eventually reduced the term.
If I was in this exact position today I would still be living with my parents or renting as at the time I couldn't afford the payment on a capital & Interest basis. The impact of this would be another house is not sold in the already stagnant mortgage market. Another little bit of growth missed! NO sale = NO VAT (estate agents, Valuers & Solicitors) and stamp duty would not have been paid! Revenue needed by our indebted government.

So lets look at both sides?  What if somebody has an interest only mortgage and at the end of the term has not repaid the money?

Well the first this to so is yes this will happen to some who either through circumstance or lack of planning owe money at the end of their interest only term, and yes this is not ideal.
It is however, my opinion we don't need a nanny state and if these people have not addressed their mortgage requirements then they will have to sell and rent.

Life has consequences and this is one the key thing I am currently teaching my 3 year old daughter. The fact is these people had the opportunity to own their property (which currently is considerably cheaper than renting)  which may not happen in the future if we keep using a sledgehammer to crack a nut.

Matthew Duncan
Independent Financial Adviser
01934 310653.
01173 701730



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