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Interest only – not so much of a ticking time bomb

The Financial Conduct Authority, the new regulator, warned this week that almost half of those with interest-only mortgages may not have enough money to pay off their loan when it matures. This suggests some 1.3 million homeowners face a shortfall.

However, for many this isn’t really a time bomb as there is still time to do something about it. There is no need to panic but there is a need to take action. Look at your situation and see whether the numbers add up. If they don’t, it’s time to do something about it and there might be several options open to you:

* Switch to a repayment deal: This might mean a significant jump in monthly payments if you don’t have many years left on your mortgage but it would guarantee clearing the capital by the end of the term if you could afford to do this.

* Overpay: Most lenders will let you overpay by up to 10 per cent of the mortgage amount per annum so you could start chipping away at the capital.

* Extend your mortgage term: If you have to repay the capital on  your mortgage in say five years’ time and are unable to raise the required funds in time, one option may be to remortgage and extend the term. However, this may be tricky if you are nearing retirement as a number of lenders don’t like to lend into retirement. Speak to us as to which lenders are more flexible than others when it comes to age.

* Save or invest more: You might not wish to throw good money after bad if your endowment is underperforming but there might be other investments and savings worth considering.

* Downsize: Sell up and move to a smaller property, freeing up capital to clear the outstanding balance on your mortgage.

We have been inundated with requests from borrowers in the past few months for interest-only mortgages, as mainstream lenders further tighten their criteria. Interest only is turning into a niche product. It may still be possible to borrow on interest-only terms via the high-street banks but much trickier than in the past. The majority of borrowers who need interest only will now have to look at the private banks – if they meet their criteria. Clients must be wealthy or on track to become wealthy at some point.

As long as a client has a considered repayment strategy in place that they can comfortably meet, interest only is arguably no riskier than a repayment mortgage. If the borrower has a remuneration structure which has a significant element paid in annual bonuses or stock and share allocations, or there is a realistic and viable anticipation of a future capital event, or they will sell a property to pay off the capital, then I would argue that they should be able to borrow on an interest-only basis.

For example, if a client who relies heavily on bonuses for a significant proportion – perhaps the majority – of his income, can’t borrow against all of it, he will be severely penalised. A high-street lender may lend against no more than 50 per cent of the bonus, meaning a large and valid part of the borrower’s annual income would be ignored. If the client earns £100,000 basic and £200,000 bonus, he might be able to borrow four times income or £800,000, if all his base salary were taken into account and half his bonus. But there is an annual £100,000 that is not being considered.

In theory, this forgotten £100,000 per annum could enable him to pay off the mortgage in eight to ten years. What would be the point of a capital and interest mortgage over 25 years? Luckily for this client, he may qualify for private banking and therefore get his interest-only loan. Not everyone will be so lucky.

Contact Anderson  Harris to discuss your interest-only requirements.

Private bank mortgages: better than the high street?

Yesterday’s Sunday Times took at look at whether wealthy borrowers are turning to high-street lenders for large loans. The article concluded that private banks were being spurned due to strict terms, namely the need to transfer assets under management in order to satisfy the bank’s requirements to build more than simply a lending relationship.

The Sunday Times points out that there are some very cheap rates available on the high street, such as Chelsea Building Society’s two-year fix at 1.74 per cent with £1,825 fee, for those with a 40 per cent deposit. Chelsea will lend up to £5m directly from branches, while Woolwich has also increased its maximum loan size to £2m, up from £1.5m.

My fellow director Adrian Anderson was quoted in the article, saying: ‘Private bank mortgages often have conditions that might not be in the contracts of conventional mortgages.’ This is true of the private banks but it is also true of high-street lenders. If many of those borrowers with regular high-street mortgages were to read the small print they too would be spooked.

For example, Bank of Ireland recently decided to aggressively hike the margins on its base-rate tracker mortgages, despite no movement in the Base Rate. The Bank was able to exploit a loophole in the small print that many borrowers would have been unaware existed.

Private bank mortgages: room to negotiate

While private bank contracts can come with lots of clauses, this is often only a starting point. It is up to the broker to negotiate with the bank on behalf of the client to remove or alter some of the clauses until a point is reached where everyone is happy. It varies considerably from client to client: we recently had a client who was offered a deal with more clauses than usual but he made an informed decision to proceed as the pricing was so good.

Many of the clauses are in place to prevent a new client taking a mortgage and then not making any attempt to develop a relationship. Many private banks feel they have gone too far down the lending route since the financial downturn and are trying to claw back more of a relationship with the client.

So does this mean the high street is now a better option for large mortgages? We’ve said before that it might be but in our experience of large loans, it usually isn’t. This is mainly because wealthy borrowers need certain things that high-street lenders are not good at delivering:

1) Wealthy borrowers often need speed of service – something never guaranteed and often not available via high-street lenders.

2) Wealthy borrowers need a lender who understands their complex income streams – something the high-street lender which doesn’t take into account bonuses, share dividends or retained profits in a business, simply doesn’t.

Interest-only mortgages

3) And wealthy borrowers often need interest-only mortgages – again, something the high street does poorly. For example, Halifax will lend up to £7.5m but does not offer interest-only on larger loans. This is a typical stance on the high street.

We’re not convinced those borrowers requiring large loans are shunning private bank mortgages in favour of high-street lenders. But it is always good to have some healthy competition.

Private bank mortgages

A journalist suggested to me this week that private bank mortgages were no longer likely to be as competitive as high-street mortgages now that high-street lenders can call upon money available via the Funding for Lending Scheme FLS). He argued that while private bank mortgages had consistently undercut their high-street equivalents over the past few years, this perhaps was a situation that could not continue.

He said he would like to write about private bank mortgages in the future but confessed that he thought there would be less reason to do so going forward. Instead, the headlines would be all about applying for cheap loans because of the FLS.

Why private bank mortgages are more competitive

Yet it is highly unlikely that private bank mortgages are going to start looking uncompetitive all of a sudden when you compare them with what is available on the high street. Admittedly, we are seeing some of the lowest mortgage rates ever seen from mainstream lenders, which is excellent news for borrowers with straightforward income streams who don’t need to borrow large sums of money.

However, even better news for wealthy borrowers with complex income streams is that the private banks will still have an important role to play. You need to understand how they work in order to appreciate that they will still be able to offer some of the best mortgage rates, even if they aren’t accessing the FLS – and some private banks are taking advantage of these cheap funds.

Why you’ll never find a best buy table for private bank mortgages 

Private bank mortgages don’t come in ‘best buy’ tables which are issued to prospective customers. They are tailored to the client depending on their situation, income, assets, the property they are trying to buy or refinance, and any other properties in the background. The private bank may well offer a low mortgage rate – cheaper than the high street – in order to get that client on board, encourage them to bring over their investments and perhaps their savings.

For the private banks it is all about building a transactional relationship with the client, not simply giving them a private bank mortgage. Thus they can agree an investment mortgage on normal residential terms – something unheard of on the high street since the downturn. Private bank mortgages tend to come on interest-only terms, which suits many thousands of borrowers who can’t access these terms on the high street.

How Anderson Harris can help arrange private bank mortgages

Private bank mortgages are our speciality. We deal with many private banks and can find the right one for your situation. You might not need to transfer assets under management, it depends on the private bank. Speak to us if you require flexible underwriting and a tailored situation to fit your circumstances.

Private banks the answer to interest-only mortgages

The New Year may barely have started but with two high-street lenders already tightening interest-only criteria, 2013 looks set to be a tough year if you require an interest-only mortgage – unless you go to a private bank.

Yet while lenders are reining back on interest only, borrowers still demand it. We have seen a significant increase in clients seeking interest-only options as several high-street lenders including RBS, NatWest, Nationwide and the Co-operative Bank, have stopped offering interest only to new borrowers. Other lenders have severely restricted their interest-only terms, meaning many borrowers no longer qualify.

The latest changes from Woolwich and Virgin Money are more tweaking the detail in terms of minimum loan sizes and maximum loan-to-values rather than abolishing interest only outright. But the conclusion is inescapable: interest only has become a niche product. It may be possible to borrow on interest-only terms via high-street banks but it is much trickier than in the past.

Private bank mortgages

However, there is an alternative. The private banks continue to offer interest-only terms to clients who are wealthy or on track to become wealthy at some point.

If you have a remuneration structure with a significant element paid in annual bonuses or stock and share allocations, or there is a realistic and viable anticipation of a future capital event, or you will sell a property to pay off the capital, then it could make sense to borrow on an interest-only basis.

Contact Anderson Harris to discuss your interest-only requirements.

Interest-only mortgages: increasingly a niche product but there are options

We have been inundated with requests from borrowers in the past few weeks for interest-only mortgages, as mainstream lenders further tighten their criteria. A couple of months ago I penned a blog on interest only and now seems a good time to update it, as there have been significant changes by some lenders.

Coventry Building Society is the latest lender to pull the plug on interest only for new borrowers. RBS and NatWest recently announced that they would no longer off interest only to new borrowers, while Nationwide and the Co-operative Bank have introduced similar restrictions.

Interest only is turning into a niche product. It may still be possible to borrow on interest-only terms via the high-street banks but much trickier than in the past. The majority of borrowers who need interest only will now have to look at the private banks – if they meet their criteria. Clients must be wealthy or on track to become wealthy at some point.

As long as a client has a considered repayment strategy in place that they can comfortably meet, interest only is arguably no riskier than a repayment mortgage. If the borrower has a remuneration structure which has a significant element paid in annual bonuses or stock and share allocations, or there is a realistic and viable anticipation of a future capital event, or they will sell a property to pay off the capital, then I would argue that they should be able to borrow on an interest-only basis.

For example, if a client who relies heavily on bonuses for a significant proportion – perhaps the majority – of his income, can’t borrow against all of it, he will be severely penalised. A high-street lender may lend against no more than 50 per cent of the bonus, meaning a large and valid part of the borrower’s annual income would be ignored. If the client earns £100,000 basic and £200,000 bonus, he might be able to borrow four times income or £800,000, if all his base salary were taken into account and half his bonus. But there is an annual £100,000 that is not being considered.

In theory, this forgotten £100,000 per annum could enable him to pay off the mortgage in eight to ten years. What would be the point of a capital and interest mortgage over 25 years? Luckily for this client, he may qualify for private banking and therefore get his interest-only loan. Not everyone will be so lucky.

Contact Anderson  Harris to discuss your interest-only requirements.

The interest-only mortgage – in danger of becoming a niche product?

With the Financial Services Authority set to publish its Mortgage Market Review this week, it is likely that banks will be forced to impose tighter controls on interest-only mortgages.

Yet, interest only is already turning into a niche product. It may still be possible to borrow on interest-only terms via the high-street banks but much trickier than in the past as lenders have radically tightened their criteria.

It means the majority of borrowers who borrowed on an interest-only basis, would probably no longer qualify. Most high-street banks would prefer not to offer interest-only terms, regarding it as too risky.

The place to go for interest only is the private banks, which makes it a niche product. While the private banks have various terms and conditions they all have one thing in common – they deal with wealthy clients. If you aren’t wealthy or on track to become wealthy at some point, you won’t qualify so in that sense they are niche.

Their reviewable five-year facilities mean a client’s interest-only strategy is revisited on a fairly regular basis so if it’s not on track, an element of amortization can be introduced. While this works well on a small scale, it would be tricky to introduce this level of scrutiny on a mass-market basis.

But maybe interest only should be niche. Critics argue that it is higher risk than a repayment mortgage because there is no ‘guarantee’ that the loan will be paid back at the end of the term. But if a client has a considered repayment strategy in place that they can comfortably meet, is it really any riskier? If the client has a remuneration structure which has a significant element paid in annual bonuses or stock and share allocations, or there is a realistic and viable anticipation of a future capital event, or they will sell a property to pay off the capital, then I would argue that they should be able to borrow on an interest-only basis.

For example, if a client who relies heavily on bonuses for a significant proportion – perhaps the majority – of his income, can’t borrow against all of it, he will be severely penalised. A high-street lender may lend against no more than 50 per cent of the bonus, meaning a large and valid part of the borrower’s annual income would be ignored. If the client earns £100,000 basic and £200,000 bonus, he might be able to borrow four times income or £800,000, if all his base salary were taken into account and half his bonus. But there is an annual £100,000 that is not being considered.

In theory, this forgotten £100,000 per annum could enable him to pay off the mortgage in eight to ten years. What would be the point of a capital and interest mortgage over 25 years? Luckily for this client, he may qualify for private banking and therefore get his interest-only loan. Not everyone will be so lucky.

Rising mortgage rates and service issues: why you need a broker

The Bank of England has voted to keep interest rates at 0.5 per cent for another month. This is not surprising; indeed, it is widely expected that Base Rate – which has been static for more than three years – won’t rise for another couple of years at least.

Yet while interest rates haven’t moved, mortgage rates are on the rise. A handful of lenders, including Halifax, have raised their mortgage rates in the past week, following lenders such as Clydesdale and Yorkshire Banks increasing their standard variable rates earlier this month. Interest-only criteria continues to tighten, making it increasingly difficult for those with bonus-driven incomes to secure funding.

Service issues at certain banks are also causing problems for borrowers. We have seen a significant increase in buyers coming to us in desperation because their mortgage offer is taking so long to process that they are in danger of losing the property they are trying to purchase. When there is a dearth of desirable properties on the market, this is a disastrous situation for a buyer to find themselves in. Some lenders are taking several weeks just to get an offer out because they have been inundated with demand for their ‘best buy’ deals or have restricted their conveyancing panel. But this is too slow for many.

However, Anderson Harris can help steer clients in the direction of lenders who aren’t experiencing service issues. We can assist with getting funding arranged at relatively short notice and we know the private banks to approach for the right sort of client who needs interest-only.

These are difficult times when it comes to borrowing but there are often solutions if you know where to look. Advice is more crucial than ever.

Interest-only mortgage? Try a private bank

With more mortgage providers cutting back on interest-only lending, the estimated 1.5m borrowers on an interest-only mortgage may be wondering what will happen to them. Switching to a repayment mortgage may be your lender’s preferred option but this will mean a significant jump in your monthly mortgage payments, and may not be compatible with your income streams.

Lenders have followed each other like sheep, reducing maximum loan-to-values on interest-only to around 50 per cent, insisting on a restricted number of repayment vehicles or a minimum income of £50,000 per annum, or in some cases, refusing to offer interest-only at all. They blame the Financial Services Authority for proposals in its Mortgage Market Review (MMR) that mean lenders will have to regularly check borrowers’ repayment vehicles to ensure they are on track to pay off the loan. This will increase the burden on lenders, with some deciding that they are better off not offering interest-only at all or on a much-reduced basis.

The end of interest-only was not what the MMR intended to achieve but this seems to be the sad result. Subsequently, borrowers have become ‘mortgage prisoners’ stuck on their existing deals, unable to remortgage or move to another property.

Yet interest-only may still be the correct solution for certain borrowers, those who have a repayment strategy in place and review it on a regular basis. Interest-only borrowing is still available for the right sort of client via the private banks. Brokers such as Anderson Harris can access such deals, and are happy to review your funding arrangements to see whether you would meet criteria. Please get in touch if you wish to discuss this further.

Need an interest-only mortgage? Try a private bank

With Santander and Lloyds Banking Group tightening their terms on interest-only borrowing in the past week, those who require such a loan may be worried about their prospects of finding one.

Over the past year, many lenders have reduced the maximum loan-to-value (LTV) on interest only to 75 per cent, and required that borrowers provide proof of how they intend to repay the loan from a limited number of acceptable methods. This crackdown followed an early draft of the Financial Services Authority’s Mortgage Market Review, which revealed plans to make lenders monitor the ability of borrowers to find a suitable plan to repay the capital. This will push up costs and is now deterring lenders from offering interest-only mortgages in the first place.

But private banks behave differently. All of the private banks are comfortable with interest only, particularly as their usual terms are five years with a reviewable facility, rather than a 25-year repayment commitment. This means they can review the loan after this time and satisfy themselves that the client will be able to repay the capital.

While high-street banks need to see evidence of a repayment vehicle, private banks are more likely to take a view, especially as they will have more details about the client’s assets and liabilities. High-street lenders, on the other hand, do not usually look at assets and liabilities as they mainly focus on income to service the debt and still presume that the client will take out an ISA or similar to repay the capital.

Interest only suits many of our clients as their income streams mean they rely on dividends and bonuses, which can be used to pay lump sums off their mortgage. If you are in this position and are not sure what to do, speak to Anderson Harris, as we understand the private banks and their criteria.

Mortgage Market Review: what it means for high-net-worth borrowers

Today sees the publication of the long-awaited Mortgage Market Review (MMR) from the Financial Services Authority. The proposals, which are now subject to further consultation, are designed to prevent a return to some of the irresponsible lending seen before the credit crunch.

There is much in the news about the general impact these proposals may have on the mortgage and property markets. But what about high-net-worth (HNW) and wealthy borrowers who make up the bulk of our clientele? We thought it important to blog about the specific impact the MMR is likely to have on this group.

The self-employed will be affected by the proposal that income must be verified for every mortgage application. Indeed, self-certification loans – where the borrower stated their own income – have already vanished. But just because you must now prove your income doesn’t necessarily make it impossible to get funding. Lenders have different requirements on this, asking for accounts over various periods of time, as well as taking other factors into consideration. We know which lenders are most sympathetic to the self-employed so don’t assume it will be impossible to get funding. Check with us first.

It’s not just the self-employed who may have a problem proving income. If you are one of the many people who have a complicated income stream, perhaps made up of bonuses, retained profits in a business, performance-related pay or offshore income, your average high-street lender will struggle to understand it. This could severely restrict the amount you are able to borrow. But all is not lost because the private banks really come into their own here as they are prepared to look at the bigger picture and better understand the needs of wealthier borrowers.

The clampdown on interest-only borrowing could have a big impact. Under the proposals, all borrowers will have to provide evidence of how the capital will be repaid. Anyone who has tried to take out a mortgage recently via a high-street lender will know this is already happening, with restrictions on loan-to-values and acceptable repayment vehicles. The FSA really has first-time buyers in mind who may in the past have opted for interest-only in order to stretch their affordability but many more borrowers will be caught in this net. However, private banks can be particularly helpful as they better understand interest-only borrowing than high-street lenders and will consider an inheritance or the sale of the property as a legitimate alternative to an investment such as an ISA.

All really is not lost, particularly as the FSA admits that wealthy borrowers – those earning £1m a year or with net assets of £3m – may be treated differently from those with more modest incomes and assets: ‘there is an argument that above some level of income and wealth… it is perfectly reasonable for a consumer to take greater risks and that regulation is not needed to protect those consumers from the decisions they have made.’

This may explain why the FSA proposes that those using a mortgage to consolidate their debts should seek compulsory advice, while wealthy borrowers should not have to. Here we beg to differ: everyone should seek advice when taking out funding to ensure they are getting the right deal for them. There are so many specialist lenders and private banks you may not even have heard of which may just provide the right funding solution for you.

Why miss out? Your mortgage is too big a financial commitment to take chances on, no matter how wealthy you may be.