Interest Only Loans A Higher Risk For Smaller Borrowers
One of the proposals from the Financial Services Authority (FSA) in it Mortgage Market Review (MMR), is that there should be a complete ban placed on people taking out an interest only loan against their property in the future.
The argument for this course of action is that taking an interest only loan demonstrates that the borrower can not realistically afford the full repayments on the loan and are stretching themselves too far and will never actually repay the loan until their property is sold.
Paul Broadhead of the Building Societies Association (BSA) has suggested that smaller interest only loans pose a higher risk to lenders than large loans do, as borrowers at the lower end of the loan market were more likely to overstretch themselves than someone taking out a large loan.
Mr Broadhead said “Someone borrowing on an interest only basis for a £100,000 house and then finding they can’t afford to repay will present a bigger risk for the lender in reality than someone borrowing £500,000 for a million pound house.”
Although the BSA agree with the FSA on the potentially higher risks associated with an interest only loan, they do not believe there should be a total ban imposed, but only on loans below an amount of £500,000, as individuals who borrow larger amounts on an interest only basis may do so for various reasons other than affordability of the loan.
However, not everyone agrees. The Lloyds Banking Group has just placed their own ban on interest only loans above £500,000, although they will still offer them for smaller loans.
A spokesman for the bank said “On a loan of that size it’s even more crucial to ensure that the borrower can repay because the shortfalls can be so much bigger, that’s why we’ve introduced the restriction we have.”
