Interest Only Home Loan Guide Introduced
Times are tough in the mortgage market at the moment, both for lenders and for borrowers. Despite house prices having reduced on a month by month basis through the course of the year so far, property prices still remain extremely high, particularly for first time buyers. Wages have not risen in proportion to the cost of housing and as lenders withdraw more and more of their home loan products, the cost of borrowing is not coming down.
As a result of this, many individuals buying a house (not just first time buyers) are choosing to keep their monthly costs down by opting for an interest only mortgage. As the name suggests, this is where the borrower only pays interest on the loan each month, without any capital element to their repayments. If no additional payments are made on the loan, or some type of repayment vehicle used (i.e. an endowment policy or ISA), then the full balance of the mortgage loan will remain outstanding at the end of the term. Clearly, this is not a desirable position to be in, but approximately 24% of new mortgages are currently taken out on this basis.
Pink Home Loans, a subsidiary of the Skipton Building Society, has now introduced a guide to interest only mortgages, to be used by those who sell its products to ensure that best advice is being offered. The move comes as the Financial Services Authority (FSA) is starting to take a closer interest in this type of mortgage within their affordability and responsible lending initiative.
The FSA is due to launch its own guidance notes on good practice for interest only mortgages later this year and it is therefore quite likely that we will see many other lenders following Pinks example. The end result is that it’s likely to be harder to obtain an interest only mortgage in the future, but those borrowers who do take such a loan will be better informed of their responsibility and the consequences of not having a repayment vehicle.
