Santander raise interest-only mortgage age limit
SANTANDER are to raise the age limit of their interest-only mortgage from Tuesday, extending it from 65 to 70.
With this move, more customers will be able to take advantage of a mortgage that enables them to begin by paying only the interest on their home loan, deferring repayment of the loan itself until a later date.
This is opposed to a normal, repayment mortgage, which requires that the interest and the loan be paid together from the very beginning, and which is increasingly too expensive for many people to afford.
However, while this might make interest-only loans appear much more attractive, they can come with considerable risks, especially if the value of a purchased home declines during the period of interest-only payment.
What is an interest-only mortgage?
And it's largely for this reason that many banks and building societies don't offer them any more, despite their being popular enough in the 1980s to make up around 80% of all mortgage loans.
This popularity was due to the fact that they were often taken out in parallel with an endowment policy, a type of life-insurance investment contract which agrees to pay out a guaranteed sum - often in addition to profits - after a fixed period of time.
Such policies were generally needed because, even though interest-only mortgages do allow holders to enjoy a period of interest-only payments, they still ultimately require that the value of the relevant property be paid for by holders.
This means that, after a period of 25 years of paying interest alone on a £300,000 house, holders will still owe, say, £225,000 to their bank if they paid a 25% deposit, as the comparison table below makes clear.
|25% LTV, 25-year mortgage on £300,000 house at 2% interest||Interest-only mortgage||Repayment mortgage|
|Amount owed after 25 years||£225,000||£0|
Decline and re-emergence
Unfortunately, while interest-only mortgages allowed customers to defer repayment of the loan until the time when they'd theoretically be better able to afford it, endowment policies were hit by a mis-selling scandal that seriously damaged their reputation.
In turn, this resulted not only in customers suffering from stark funding shortfalls, but in many banks withdrawing interest-only mortgage products from the market.
Yet over the last couple of years, these products have begun creeping slowly back onto the scene as a result of historically low interest rates, although this time they've come with tighter restrictions and criteria.
For example, Santander's interest-only mortgage is limited not just to those who'll be under 70 by the time the mortgage term expires.
Among other conditions, applicants also have to put forward a deposit of at least 25%, while their gross income has to be at least £50,000 (or £70,000 on a joint application).
Not only that, but if the "repayment vehicle" - i.e. the source of funding for the capital on the loan - is the future sale of the property being mortgaged, then the term is limited to a maximum of 25 years.
Repossessions in 2017
That the so-called repayment vehicle for an interest-only loan is often the house itself is perhaps the biggest issue with interest-only mortgages.
What such a reliance on house sales reveals is that, rather than having a definite, reliable funding plan, homebuyers are gambling that property prices will simply keep rising.
At the moment, they may be climbing, yet as the financial crisis of 2007-8 revealed, the possibility of falling into negative equity is always there.
And as for those who haven't identified the sale of their house as their means of repayment, Citizens Advice found in 2015 that, of the 3.3 million interest-only mortgage holders in the UK, 1.7 million "have no linked repayment vehicle" whatsoever.
It's for this reason that the Financial Conduct Authority have predicted a high number of repossessions during this year and the next, as interest-only mortgages sold at the close of the last century come to term.
It's also for this reason that those who are considering such a mortgage think very carefully about how they'll repay the capital at the end of the interest-only period.
To counter the possibility that they may find it difficult to repay the capital, Santander do in fact offer the option of having part of the mortgage interest-only, and the other part interest and capital.
While this means that monthly repayments will be higher, it usually works out cheaper than renting and it offers a similar (although obviously shorter) interest-only "grace period". More importantly, it also enables customers to get a head start on paying off the capital, so that they're not left with massive debt near the end of the mortgage.
That Santander (and other banks) are offering combinations of repayment methods like this - as well extending the age limit to 70 - shows that the mortgage market is finding increasingly inventive ways of helping people to become homeowners despite the housing crisis.
Of course, it would be much more preferable if enough new homes were built to make prices more affordable, but for now the extension of interest-only mortgages will have to do, at least for those who can be sure they'll pay off the capital.