Contractors get a lifeline in the interest-only mortgage crackdown
Lenders are continuing to remove interest-only mortgage products ahead of a change in regulatory approach that is due to come into force from April next year, writes Tony Harris, of freelancers’ IFA ContractorMoney.
Interest-only exodus is pre-emptive
The new regulations look increasingly as if they will discourage interest-only loans, which allow home buyers to only repay the interest each month, to those individuals that have no repayment vehicle in place. This follows fears that the majority of interest-only borrowers have no means of paying off their mortgage when the term ends.
The freshly appointed Financial Conduct Authority (FCA) is determined that future homeowners won't be able to make what it views to be the same mistakes as previous generations of borrowers and so, from April 2014, borrowers will need to prove that they have a repayment vehicle in place to pay off their mortgage when the term ends, whether that be an ISA, a pension or other investments.
Implications for contractors
Interest-only borrowing has always been popular with contractors who appreciate the ability to make ad hoc overpayments while keeping fixed monthly costs as low as possible. In this way the early years of home-ownership and freelancing can be made more affordable, perhaps while a safety net is built up against time between contracts.
Unfortunately, the FCA’s new regulatory approach will even leave many existing homeowners unable to remortgage once their current interest rate comes to an end and could potentially lead to thousands of borrowers being unable to afford to keep their homes. Interestingly, even the regulator itself is reportedly concerned that lenders pulling their products in advance of its new approach could cause people to suffer.
Against this seemingly gloomy backdrop of almost weekly announcements that yet another mortgage lender has pre-empted the FCA’s April regulations (by scrapping their interest-only products), there is however a chance that contractors are being thrown a lifeline.
A future proof interest only-mortgage?
In what is arguably the perfect workaround to the new regulations, one contractor-friendly mortgage lender is offering the opportunity to borrow on an interest-only basis for the next three years without the hassle of having a repayment vehicle, such as an ISA.
Instead you, the contractor, are offered the interest-only rate for the first three years and then automatically transferred to a repayment mortgage once the initial term is up. This will remove the need to arrange a separate repayment vehicle, so contractors will ultimately benefit from the certainty of a repayment mortgage in the long term and so avoid having to find a large lump sum to repay the debt at the end of the mortgage-term. Further details are available via the ContractorUK Money Club.
Let’s hope that other lenders also realise that responsible interest-only borrowing still has a legitimate place in the mortgage landscape, because freelancers and contractors could be poorly served by a move to mortgages that insists on a more rigid repayment commitment.