Do Interest Only Mortgages Make Commercial Sense?

There is a long standing debate within the residential mortgage market around the viability of interest only mortgages. The Financial Services Authority (FSA) have made no secret of their distrust of lenders who rely on interest only lending. However, some consider that this is a consumer driven product and it is quite likely that most lenders would prefer to restrict interest only loans to a select minority.

John Ward, writing for Mortgage Introducer, recently said

Interest-only lending has its place but is an undeniably higher risk product for lenders and one that should rightly remain as a niche rather than mainstream product.

The full article is on the mortgage introducer blog.

If you consider that interest only loans more-or-less started out of the growth in alternative redemption vehicles, such as endowments and pension backed products. They were initially tightly controlled so that a borrower could only take on an interest only mortgage if they could evidence a credible repayment vehicle. In the 1980’s and 1990’s it was not uncommon for lenders to periodically review mortgage accounts to ensure that endowments were on track.

From a commercial perspective, interest only loans do not appear make a great deal of sense. It is questionable whether a lender borrowing money on the wholesale markets and not seeing any capital being repaid until the term of the loan is sustainable. Clearly many of the lenders in this market were relying on securitisation to release capital.

So with the FSA expressing their misgivings about the commercial value of interest only mortgages it should come as no surprise that lenders like Accord and The Leeds are all tightening their criteria around interest only products. Perhaps they are using the FSA’s steerage as an excuse to distance themselves from a product they never really wanted to be involved with (in any volume). For example Santander stated that they will no longer pensions, the sale of a second property as repayment vehicles. This follows a cut in maximum loan-to-values to 50% (for interest only products).

Whilst it is rarely safe to compare residential and commercial mortgages, it is interesting to note that up until 2005 there were few commercial lenders prepared to lend money on an interest only basis. And when the squeeze came interest only commercial mortgages were the first to go.

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