People buying a home in the UK have been encouraged, with the news that mortgage rates are set to remain at historic lows for some time, despite previously widespread reports that they would rise early in 2016.
The Bank of England has indicated that the present 0.5% base rate is highly likely to remain until deep into 2016 or even 2017. Rates have been at this historically low level now for 80 consecutive months.
Concerns
There are concerns however that home purchasers could get too used to low interest rates and, as a result, this could backfire as interest rates do eventually begin to rise.
An investigation conducted by Experian seems to suggest that people who failed to secure a mortgage are failing to conduct the basic research required to get control of their finances. 13% were found to be unaware of how much money they would have left over at the end of every month, while 18% did not know what monthly payments they could afford.[1]
Additionally, the research showed that 14% did not have a large enough deposit for the property that they desired, with 12% unable to secure the size of the relevant mortgage they needed.
Worried
Further research from Ocean Finance shows that nearly three quarters of home owners with interest only mortgages are worried that they may not be able to repay their loan. Interest only deals are where borrowers pay the interest on their loan for the duration of their mortgage, then repay the capital when the mortgage term ends.
Only 31% of these interest only borrowers stated that they had a separate investment policy in place to pay the capital , such as an endowment or an ISA. 16% said that they planned to switch to a repayment mortgage before the end of their existing loan, with 31% saying that they expected to have to sell their home to settle the existing capital.[1]
Gareth Shilton, spokesperson for Ocean, said, ‘interest only has become popular in the 1990s as a way for consumers to afford homes at a time when property prices were soaring. Lenders often agreed interest only loans without confirming borrowers could repay the capital owing at the end of the mortgage. By the end of 2012, most lenders stopped offering interest only deals after tightening their lending rules.’[1]
‘It’s advisable to seek advice on whether they can overpay on their current interest only deal, switch to a repayment mortgage, or use an ISA or pension to settle the capital payment,’ he added.[1]
Interest-only popularity
In the 1990’s interest only mortgages became popular as a way for consumers to afford property when house prices were spiralling. During this period, lenders often agreed interest only loans without confirming borrowers could repay the capital owning at the conclusion of the mortgage. By the end of 2012, the majority of lenders stopped offering these types of deals after tightening lending rules.
Shilton feels that, ‘while there is a place for interest only mortgages, it is a specialised product that suits a small number of borrowers, rather than being the mass market product it become in the 1990’s. For example, if you have a large family home that you know you don’t plan to stay in once your children have left home, then interest only could make sense.’[1]
‘Interest only mortgages are now typically only being approved for borrowers who can demonstrate they have a repayment vehicle or pension pot that is forecast to repay the capital element. Usually, borrowers also need to have a significant deposit that gives them a big equity gap,’ he added.[1]
[1] http://www.propertywire.com/news/europe/uk-buyers-interest-rates-2015110611174.html