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Interest only - in the investors' interests?

26th March 2008 | back to article listings BACK    print this article PRINT

The mortgage market has been much talked about in recent years, first through the increasing need for many buyers to find innovative new products and methods to get on the ladder as prices have risen, then more recently as the availability of products has contracted following the credit crunch.

In the midst of it all, we have had shifts in comparative levels of popularity between fixed, variable and tracker-rate mortgages depending on interest rates, followed by the statement of intent by chancellor of the exchequer Alistair Darling that he wanted to see more long-term fixed-rate mortgages, noting during his budget speech that these are common in countries such as Denmark and arguing that they bring greater stability.

For many, however, the way ahead has been to take out interest-only mortgages. Figures from mform.co.uk show these have been making up an increasing slice of the market, accounting for 21 per cent of deals in 2006, 24 per cent last year and 24.5 per cent in January this year.

But are such deals a good move? According to the Council of Mortgage Lenders (CML), the answer may well be yes, provided those taking them out plan ahead.

CML communications manager Bernard Clarke said taking such a mortgage "may still be a perfectly rational approach as long as the borrower is fully aware of the consequences and reappraises the need to put in place a plan for the repayment of the capital over the course of the loan, so they may move to a repayments mortgage or set up a savings plan when their finances allow them to do so over the lifetime of the loan".

A key issue here is that buy-to-let investors make up a significant part of the market, Mr Clarke noted, stating: "Another factor is the buy-to-let market which is quite large now, relative to the overall mortgage market and most of the borrowing in the buy-to-let market will be done on an interest-only basis, so that has tended to bump up the interest-only loans."

In practice, what this means for such investors is that they need to ensure their outlay is a good one in order to ensure that when the time comes to pay up the capital after the interest has been repaid, the yield on the property will have provided enough extra funds to do so.

Fortunately, the signs for this currently look good, according to Birmingham Midshires Building Society. The lender's managing director of mortgages, Tim Hague, said today: "With landlords enjoying an average return of 16.3 per cent in 2007, a buy-to-let remains a sound long term investment," reported Easier.com.

With returns like that, interest-only may indeed be the way ahead for many investors in property.

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