12 October 2012

Interest Only takes another blow


Over the last few months I’ve mentioned Interest Only quite a bit.  Interest Only is one option to pay your mortgage, but it does exactly as it says, you only pay the interest on the loan.  So at the end of the term, say 25 years, you still owe exactly what you started with.   Normally a savings plan is also set up to build funds over time to match the mortgage amount at the end of the term.
This might be right for certain individuals who have careers that pay out a lump sum after a term, or for someone who gets many bonuses.  But unfortunately, that will no longer be a mortgage option you can get through Nationwide.  They have pulled out of offering Interest Only across their entire range of products.  The country’s biggest Building Society has said that it has taken the decision to remove this option as they were only processing 3% on this type of product.   In the scheme of things, very small and what happened to customer choice? 

The mortgage market is awaiting the imminent final release of the FSAs Mortgage Market Review (MMR) which highlights areas due for change and implementation of stricter rules across the market.  Interest Only was mentioned in the consultation stages, but it does appear that an over-reaction has occurred across the market place with many lenders restricting the amount that could be borrowed on Interest Only and Nationwide’s move could/will lead to others following suit and removing the option entirely.  No one wants to be the last man standing!
There’s no denying that this product has sadly been abused by some across the country in order to keep customers costs down and no suitable repayment vehicle being set up.  However, not all should be tarred with the same brush.  Many customers have reasonably performing endowments and investment returns that will repay any Interest Only mortgages and cause no risk at all, mainly thanks to the advice, recommendation and the brokers ‘knowing their customer’.  

In addition, lenders are consistently writing to all customers on Interest Only to ensure that a suitable repayment plan is in place and those who are no nearer to the end of their term should have sorted alternative arrangements.  Are you one of them?  Act now.
Without doubt this move has sent shockwaves through the industry and if others do follow suit, many customers could simply become mortgage prisoners with nowhere to go.

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