Interest Only Buy to let Mortgages, the FSA and the Mortgage Market Review
Lenders new found worries about interest only mortgages is impacting buy to let mortgages too. It is likely the smart lenders who understand buy to let will benefit from this, says David Lawrenson of www.LettingFocus.com. Private landlords need to shop around to find these lenders.
Residential interest only mortgages are the cause of a great deal of worry for the FSA as hundreds of thousands of these mortgages are coming to the end of their term in the next few years.
For those in their late 50s and 60s the option of moving onto a new capital repayment mortgage will be expensive as the term will be limited by normal retirement age.
Why the new found worry?
Mortgage lenders are supposed to lend “responsibly”. And yet there is no clear definition of what “lending responsibly” means which leads to lenders increasingly making up their own interpretation.
This sometimes involves them withdrawing interest only mortgages completely or scaling back on the loan to values on interest only mortgages.
As well as affecting those remortgaging in later life, this all naturally feeds down to first time buyers too.
The FSA says that it is happy for interest only mortgage lending to continue just as long as the lenders ensure there is proper provision for the repayment of capital at the end of the mortgage. And the wording of the Mortgage Market Review (MMR) has made it clear that the FSA does not think inheritance or the sale of the property counts as an “acceptable repayment strategy”.
This has led some lenders to require that the interest only residential borrower has an existing appropriate savings plan i.e. Individual Savings Account (ISA), pension plan, etc which has an expected value when the loan term ends that should be sufficient to repay the loan in full.
Oh No, Not Endowments Again!
Endowment policies used to be recommended but these are usually no longer offered as new contracts by appropriate providers.
With the dreadful performance of most endowment contracts still being very much recent history, I would hope that potential borrowers would walk away rather than take out one of these silly, inflexible, expensive and utterly opaque products. (I took two out in my mid 20s – probably the worst financial decision I have ever made.)
Clearer Guidance Needed
At LettingFocus.com, we think it ought to be possible for the FSA and the latest MMR to include guidance that gives borrowers some choice in this matter and also provides some protection for lenders and brokers too – and without them having to go down the endowment route.
Now, of course, buy to let mortgages is less affected by all this, as for now at least, it falls outside the regulations. However, buy to let mortgages are not totally unaffected by these changes either.
Impact on Buy to Let Mortgages
For example, we have recent experience of lenders becoming far choosier about the term they will lend for. Most will not want to go beyond retirement age – an issue for oldies like me. And they increasingly want to know how the borrower will pay off the mortgage at the end of the term. One lender we approached for a buy to let loan said they did not think my fairly chunky portfolio of cash and equity ISAs and our other shareholdings counted for anything.
Of course, lenders are right to be concerned, but in our opinion, some of the mortgage lenders for whom buy to let is a side issue have shown that they have missed the whole point of why people borrow to invest in residential property lets in the first place.
People invest in residential property because they hope their rental properties and the income stream from them will form a big chunk of what they will live on in retirement. They are doing so expressly to get an alternative to the traditional pension or other type of fund.
They want something flexible that they can control, not something whose performance is compromised by the ubiquitous charges that are sucked out by the fees and commission demands of hungry fund providers and their retinue of salesmen.
Investing in Property is an Alternative Pension
They especially want to seek an alternative to the expensive non-company pension, the duff endowment or structured, supposedly “guaranteed” growth products that all too often “perform” for no one except the institution that sold them.
Remortgaging their buy to let investments to an acceptable LTV level ought to be an option for these folk and available to them post the normal retirement age.
Some mortgage lenders out there understand all this. But a lot still don’t. The mortgage lenders that understand will prosper whilst those that don’t will miss out.
Private landlords should therefore continue to shop around or use a good mortgage broker to seek out the smart lenders in the buy to let universe.
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