In times of crisis, lenders are going to have to get creative.
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There is more than one way to pay down your mortgage. And you don’t have to rob a bank to do it.
Numerous federal agencies and private lenders have come up with ways to keep people in their homes and maintain some activity from buyers and sellers in the housing market during the COVID-19 pandemic. While all those initiatives are going to be a huge help, they are mostly focused on getting the country through the next few months. For the millions of Americans whose lives are going to be upended for much longer than that, there will surely be programs coming that help keep them in the housing market as well.
As I wrote in the article about mortgages having a wild ride last month, part of the reason housing transactions didn’t plummet completely is because of lenders that are ‘niche and nimble’ who could pivot and respond to the sudden changes. The same approach is going to be what works over the long term too. One place that has been doing niche mortgage products for decades is the UK where homebuying has a slightly different flavor than the U.S. I’ll spare readers the historical treatise on why their lending differs, and instead offer a few examples of products American lenders should consider.
Collateral that earns interest
One idea from the UK is a product for buyers who don’t have enough money for a downpayment, but are well-qualified and are easily able to make a monthly mortgage payment. Some banks will allow their family to put the amount equivalent to the downpayment in an interest-bearing account they aren’t allowed to withdraw from for a set amount of time (usually about two years). If the buyers default on their payments during that time the savings account incurs a penalty (higher than what the regular payment would be, so it is an actual deterrent). If the buyers seriously default on the loan, then the money in the savings account is up for grabs by the bank. But if the borrowers pay everything on time during the years the money is kept as collateral, the family members get it all back plus interest.
One loan, two term lengths
Another way to divvy up the loan is to have two different borrowers on the same loan, but they each have a different length of time to repay the loan. “We see it as one mortgage, but having two parts,” says Colin Franklin, CEO of Hinckley and Rugby Building Society, who spoke by phone from the UK.
Franklin goes on to explain, “For example, if there’s a parent on the mortgage, let’s say they are currently 55 and they are planning to retire at 65. We know that their income will be strong for 10 years. So why don’t we slice a part of that mortgage and we make it over a 10 year repayment period. Then the young person who is perhaps 25, we know that over 10 years that income will grow and it will grow more strongly beyond the next 10 years. So the remaining slice of the mortgage, we could give it to the young person for 30 years.”
One crucial distinction Franklin mentions is in the UK the length of the loan doesn’t necessarily impact the interest rate the borrower qualifies for, so in their product the interest rates are the same for the two different term lengths. But since the U.S. customarily alters the rates based on length of repayment, that is another way to add some more cost-savings to the loan.
Interest-only for a portion of the loan
Yet another option is to change up the type of repayment plan. Hinckley and Rugby, for example, has an option for borrowers to pay only the interest on one portion of the loan and pay the interest and balance on the remaining portion. This would still be profitable to homebuyers if they are buying a property that is sure to increase in value during the time they live there, since they would get the profits after paying back the principal for both pieces of the loan.
“Basically it helps people to do something they wouldn’t have been able to do because getting on the housing ladder has been difficult,” says Franklin.