2012-05-29 – Edinburgh
It seems that the interest-only mortgage is a fading trend but despite the obvious difficulty this causes to the first time buyer, should this be seen as an improved situation?
This week, more high street banks have started to withdraw some, or even all of their interest-only product range. The Co-operative Bank entirely removed its interest-only range, while Santander and others have limited interest-only to only those able to fund a 50% minimum deposit, effectively excluding first-time buyers completely.
The problem with interest-only is the degree of self-discipline needed to benefit from such a scheme. Debates surrounding this issue will continue to hinge on how interventionist the FSA should be. Should consumers be protected from themselves to this degree, or is this systemic safe-guard necessary to prevent property bubbles from continuing to grow?
For consumers regularly putting aside lump sums for capital repayment, interest-only is a good way to enter the property market at a relatively low cost, however with increased risk. Nonetheless, it is thought that less than a quarter of homeowners with interest-only loans are operating in this manner. Most, simply delay the inevitable, until it is too late.
Interest-only loans, whilst providing low-cost capital, have the effect of artificially inflating property prices. Ending these products and other similar products such as high-multiple salary mortgages and no deposit deals should help bring about a gradual correction in the market in the longer term.
