So the FSA and the Mortgage lenders are going to make it bloody hard to get an interest only mortgage. This is to be done in the name of prudence since it is quite clear that large numbers of folks take out an interest only mortgage with no idea of how they will repay the capital in the end. As of now you are going to have to show how you can repay the capital and, if you are over 50, do so within 25 years. What does this all mean?
Clearly it will not assist the UK housing market. Transaction levels are already at record lows and since price/income ratios are at near record high levels the fact that fewer folks will be able to either get a mortgage or will have to get a smaller mortgage cannot help. I cannot think that this is good for house prices. But that is not really something we should care about. Unless you are a reckless property speculator (like Linda Riordan MP and some of her honourable colleagues) a house is where you choose to live.
Interest only mortgages are inherently attractive because Governments of all parties have historically been feckless and reckless and this one (or the alternative) is no exception. They will spend more than they receive print money and debase the currency. In 1971 you could buy an ounce of gold for £14. Today that same ounce will cost you £1,067. In other words the real value of the pound in your pocket has, over the 41 years since the abolition of the gold standard fallen by 98.7%. The US dollar is down by a mere 97.7%. Now if you have cash that is pretty grim. But had you taken out a 41 year interest only mortgage in 1971 then you would be over the moon. The political class would have almost eliminated the entire real value of that debt over four decades.
Now my bet is that the leopard does not change its spots and thus the political class will carry on for the next 40 years (unless the UK goes bust first) as it has for the past 40. As such an interest only mortgage is a nil brainer. Even after 25 years you can expect the real value of what you borrowed to have been decimated. As long as you can afford the interest payments, it is a one way bet. However…
My suspicion is that there are a lot of folks out there who will discover that when interest rates rise, as they surely will at some stage during the next 25 years, that suddenly they really cannot afford to meet even those bills. I suspect that this is what the authorities are truly terrified of. Given how weak the housing market is and how house prices are simply too high, the last thing that the UK economy needs is a flood of repossessions. But that is what – thanks to the interest only mortgages already out there – we shall see as base rates increase. In seeking to prevent this problem getting any greater, the authorities are probably correct. Sadly the size of the existing problem is too large not to make an impact at some stage. Horses and stable doors.