In Q&A, we take a look at some of the questions mortgage advisers deal with regularly.
Question; what are the pitfalls and benefits of an interest-only mortgage?
They say life is all about risk; this question is a prime example.
If you want the certainty that your mortgage is repaid in full (providing you keep up your payments), then you should take a repayment mortgage.
However, if the cost is too high in the short term, you could take an interest-only mortgage and move to a repayment mortgage later, although you should be aware that the interest paid will be dead money and not reduce your debt.
If you take an interest-only mortgage in the long term, you are gambling that by investing wisely, you can outperform mortgage interest rates with your investments, producing a surplus by the end of the mortgage.
However, if your investment does not perform as planned, there will be a shortfall which you will have to find elsewhere at the end of the term.
But your investment must also outperform mortgage interest rates over the full loan balance; and the entire term.
Whereas if you take a repayment mortgage, the capital part of your payment would gradually reduce the interest element, so like for like, you will repay more interest over the term on an interest-only basis too.
Also, income earned from investments may be subject to further taxation, which increases the risks of shortfalls attached to interest-only loans.
That means interest-only lending on people’s primary residence is considered high risk and is harder to arrange.
On buy-to-let loans, interest only is commonplace. The reduced monthly payments give landlords more breathing space if a tenant fails to pay; allowing for the faster accrual of additional funds for other purchases.
Hello, and welcome to this first post of the broker’s blog.
As my first topic, I wanted to comment on Gordon Brown’s recent suggestion that there may be a move to regulate the affordability models banks and building societies use when determining how much to lend.
I am probably one of few people in an industry based around percentage commission to think this is potentially a good idea, but I am all too aware of the dangers of getting it wrong.
We currently have a dual regulation system with mortgages being FSA regulated, and non-residential or second-charge lending is essentially unregulated outside of the limited involvement of the OFT (Office of fair trading).
There’s no point regulating affordability on first-charge residential loans without bringing second-charge loans and buy-to-let mortgages into the same body of regulation.
Or the effect will be to encourage further the misuse of buy-to-let mortgages to get a larger loan, leaving the market open to abuse and encouraging people to take more expensive second-charge lending for debt consolidation.
It is important not to get carried away with the sentiment of the moment and bodge regulation just because it seems like a good idea to bring the banks into line with each other.
Perhaps the question should be; is it time to regulate all non-commercial lending under the same body? As well as limit the affordability calculation used (and I include buy-to-let lending within non-commercial).
The answer is probably yes.
However, even then, there is a difficult question to consider; how do you regulate that without leaving many people locked out of a re-mortgage?
Because whilst it is favourable to have control over the fire of house price inflation, it isn’t a good idea to lock people on existing 4 to 5 times income mortgages out of competitive new rates; whilst at the same time leaving them exposed to their variable rate and every change of bank base rate.
Whatever the government does decide, they need to think carefully about how to do it without leaving thousands of people in even more danger of mortgage default.
Another important aspect is it will likely further the reduction in house prices which would, at present, leave people deeper in negative equity.
There are still many areas where the average first-time buyer can’t afford to buy at four times their income. So the market is still generally overpriced, and bringing in this type of regulation could worsen the pain of the credit crunch for many, particularly for those who have pushed their income further and are already treading water with repayments.
So, in my opinion, whilst regulation is needed, a bull in a china shop approach could be disastrous.
