Many banks and building societies pulled out of interest only or ‘endowment’ mortgages at the end of 2012. One reason was the creditworthiness potential customers needed to bring to the table, but weren’t.
The other was the lack of long-term verification that any plans in place would actually produce enough capital to pay off the mortgage at the end of the term.
As many freelancers top up their regular contracts with ad hoc projects, their income graph has peaks and troughs. Paying larger amounts, but sometimes not so much, suits interest only repayments.
CML has been working extremely closely with the FCA and will continue to do so to ensure that everyone who has an interest only mortgage has their plan reviewed periodically.
Moreover, the FCA has suggested that lenders will continue to show forbearance for anyone who has a temporary setback in their mortgage repayments, adding that solutions will be offered wherever possible.
This will depend massively on two-way communication. If you’re a contractor, especially in the South East where there has been a sharp decrease in the number of interim management hires, the FCA urge you to get in touch sooner rather than later if you’re struggling to keep up to date.
The CML has long since argued the case for interest only mortgages. Only recently, means testing of homeowners with such a loan showed that 90% did have sufficient plans in place to settle the capital part of the loan upon maturity.
Mortgage lenders will say that they were right to more or less withdraw from interest only mortgages, repayment mortgages made by far the more attractive offer for borrowers as they were.
The task in hand lenders face now is helping self employed workers and freelancers whose mortgage is due to mature soon, yet do not have finances in place to cover the amount of debt they’ll be left with.
Moving forward, the next step will be to review those whose interest only mortgages aren’t due to mature until 2020 and beyond.
To that end, the CML have joined forces with the Money Advice Service to produce the practical action plan.
The market is looking a lot rosier for borrowers with contractor mortgages. By calculating correctly in the first place, being realistic about future contractual earnings and having guidance to hand if the worst happens, interest only mortgages for contractors are far from dead.
The last thing the housing market needs is for more unaffordable homes to come on the market. If there’s a way, an alternative solution will be found to keep as many people as possible beneath the current roof above their head.
John Yerou is the owner and founder of Contractor Mortgages®; a trading style & trade mark of the award winning Mortgage Quest Ltd. One of the most recognised names in providing mortgages for contractors and freelancers across the UK.
In 2004 John began his career in Financial Services as an independent mortgage adviser and broker. John has been instrumental in negotiating bespoke underwriting for contractors with high street lenders.
His presence in the industry as a go-to expert is growing by the day and he is regularly cited and writes in publications both locally and nationally.