More housing bubble fears as interest only mortgages return

Posted on August 23rd, 2013 | Categories - News

iStock_000018295400_ExtraSmallHousing bubble fears were further increased earlier this week, as two banks have announced the return of interest-only mortgages.

The announcements come just a year after the Financial Services Authority (FSA) branded these mortgages a “ticking time bomb,” with many borrowers having no way of repaying the debt at the end of the term.

The two banks in question, Clydesdale and Yorkshire, have confirmed they will introduce a new product, which will allow borrowers to repay only interest for the first three years of their mortgage.

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Although not a full interest-only mortgage, some people fear this product could represent that start of a comeback for interest-only mortgages, which had slowly died out since the financial crisis five years ago.

Both lenders said they believe they are “the only banks offering this innovative approach as part of their range of mortgage products.”

However, some experts have criticised the approach, claiming that with interest rates so low, there is little need to help reduce monthly payments further and that borrowers could potentially get into financial difficulty when the payments rise in the future.

Whilst mortgage availability continues to grow, some experts are also cautious about the limited re-introduction of interest-only mortgages, fearing they could further fuel another housing bubble.

History repeats itself

Back in the 1980’s and 90’s using an interest-only mortgage was one of the most popular ways of arranging a mortgage. This type of mortgage was often backed by an investment vehicle, such as an Endowment or Personal Equity Plan (PEP). However, such investments were often cancelled, leaving borrowers with no way of repaying debt, or failed to hit their maturity target, leading to allegations of mis-selling.

Interest-only mortgages began to make a steady comeback in the years leading to the credit crunch in 2007. As borrowers struggled with mortgage repayments, paying just the interest was a convenient way of making larger mortgage more affordable. However, many borrowers arranged mortgages on this basis, with no means of repaying the debt at the end of the term.

In 2009, the then FSA, now the Financial Conduct Authority (FCA), warned of the high risk interest-only mortgages posed, which lead to their Director telling MPs this type of mortgage was a “ticking time bomb.”

Furthermore, in May this year, the FCA had revealed 1.3 million homeowners could be about to experience financial hardship as they may not have the money to pay their mortgage debt at the end of the term; with homeowners facing an average shortfall of £71,000.

Tighter affordability checks are to be implemented from April 2014, which led to many banks pulling out of interest-only mortgages, but the FCA has become concerned that too many lenders had abandoned this type of mortgage. Contrary to past warnings, the FCA insists interest only mortgages are “Right for certain people.”

Do you need mortgage advice?

Our mortgage adviser, Linda Wood, is here to help you. If you have an interest-only mortgage and would like advice on your options please call Linda today on 0115 933 8433, alternatively enquire online or email linda.wood@investmentsense.co.uk

Your home may be repossessed if you do not keep up repayments on your mortgage.

For providing mortgage advice we will charge an application fee of £300 and we may also be paid a fee from the lender, any fee paid by the lender will be disclosed to you. Alternatively we will charge an arrangement fee of 0.5% of the loan and refund to you any payment received by us from the lender.