Posted on: 14 August 2012
The elephant is still in the room
Earlier in the year there seemed to be changes every day to lenders’ interest only criteria as they retrenched, and then in some instances, retrenched again. This led to pages of press comment and intermediary feedback about the end of interest only mortgages and the phrase ‘mortgage prisoners’ raised its head again. For the last few months, it has been quiet with only the occasional slight change.
However, what has not changed is the elephant in the room that is the maturity of loans on interest only. The FSA raised this as an issue and whilst the CML did release some figures, it felt the concern was a little overstated.
The CML figures are reproduced below. We do not know how big an issue this will be, as the number of repayment vehicles cannot be calculated. However, what it does show is that it’s a growing issue that will not go away in the short term.
Source: CML Research
1. Based on a survey of interest-only loans as at Q2 2010, updated with
new lending data to the end of 2011.
2. Figures do not account for any unscheduled early redemptions, equity
withdrawal or repayments since Q2 2010, nor for any switches, either to
and away from interest-only, in that time.
The key question is, what will lenders’ strategies be for loans, where there is either a shortfall or no repayment vehicle at all? They probably have three choices:
- Enforce repayment of all loans
- Enforce none of them and become a lifetime lender by default
- Develop a combination of both options.
The latter strategy could create interesting challenges with the average LTV on their back books.
As intermediaries, what can we do about it?
Well, when did you last speak to your clients about their repayment strategy?
It is important that they fully understand their requirements and repayment strategy. If the only option is moving across to repayment, then the longer they leave it, the higher the monthly payment will be. Why not create your own illustration? Look at a client on a 25 year repayment mortgage; project their payments for switching to repayment under the assumption of 10, 8 or 5 years of the loan remaining. The figures can be quite an eye opener!
Are you talking to your clients every year about this? Make sure you do as some lenders definitely are.
Whilst lenders include a note in their annual statements about repayment vehicles, some are starting to ask this question in separate bespoke communications to borrowers. In addition, I feel that it would be prudent to have this yearly review or at least contact, as we are already hearing of claims firms targeting this market. What their angle is and how successful they will be remains to be seen, however accurate record keeping will be as important as ever.
So apart from changing to repayment what other options will be available? Well, if a lender is looking to enforce a loan at maturity and the LTV is low, then one area to consider could well be Equity Release.
Do you have the relevant permissions for these products? If not, then you have the options to either study for the qualifications or to create a referral relationship.
Whatever you recommend to your clients, the key is not to ignore the elephant in the room for too long.