Death of interest-only mortgages

With more lenders tightening the lending criteria on interest-only mortgages, there are fears that hundreds of thousands of borrowers will be unable to remortgage their homes
The last rites have been read countless times but now it really does look like it’s curtains for interest-only mortgages.

Nationwide, Royal Bank of Scotland, NatWest, Leeds Building Society and Coventry are the latest lenders to tighten lending criteria on these home loans in recent weeks. This follows a similar move by Santander.

But with 1.5 million mortgage holders tied into interest-only deals, there are fears that hundreds of thousands of them could become “prisoners”, unable to remortgage their homes. They will face a dearth of new deals to choose from, and may be forced to stay on their lender’s standard variable rate mortgage deals — or sell.

The mortgages were popular due to cheaper monthly payments as borrowers had to cover only the interest, and worry about repayment of capital at the end of the mortgage term. But when lenders ceased checking that borrowers were paying enough into their repayment vehicles - relying on rising house prices - some homebuyers ended up borrowing far more than they could afford.

And now tighter criteria mean that any homebuyers hoping to secure a new interest-only mortgage will struggle to win over lenders. Those who do will have to fulfil increasingly tough criteria. That could be a good thing if it stops buyers taking out mortgages they can’t afford. But those already tied in may be worried.

“Changes to interest-only policy by several lenders in the past few weeks are hugely disappointing but no surprise, and when one lender folds, the others inevitably follow,” says Mark Harris, chief executive of mortgage broker SPF Private Clients.

“Existing borrowers will be fine if they stay on their current deal and don’t require further borrowing, or stay with their lender at the end of their fixed/discounted period and move onto the SVR or another of the lender’s products. It is when they want to remortgage elsewhere, or take on further borrowing with their existing lender, they will have to meet tougher interest-only criteria. This may mean paying off a chunk of the mortgage, or moving some or all of their debt onto a repayment basis if they can afford it,” Harris adds.

“To anyone with savings earning little in the way of interest, paying off a chunk of the mortgage can make sense. But keep some money back for use in emergencies as money overpaid is practically impossible to get hold of again.”

Those who are struggling with their mortgage and want to move onto interest-only to reduce their payments for a period of time will find it more difficult to do so. “But borrowers in this position should appeal to their lender that in the interests of treating customers fairly it should consider their request, particularly if the alternative is missing their mortgage payments or repossession,” says Harris.

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