A Return of the Interest Only Mortgage!

by Mark Johnston

A Return of the Interest Only Mortgage!

The mortgage price war has intensified and if borrowers are fortunate enough to have a sizeable amount of equity in their property they may be able to cut their initial monthly payments in half.

Banks and building societies have been slashing their new mortgage rates to record lows.

clysdaleTherefore the Clydesdale and Yorkshire banks have upped the pressure on rivals by launching a range of Low Start Mortgagesthat hold out the promise of much lower payments during the first few years.

Although, these deals have raised eyebrows because the reason the payments are so cheap to start with, is they are “interest-only” for the first three years.

Mortgages where only the interest is paid each month, and where the capital debt is only repaid at the end of the term, were hugely popular in the Nineties and early part of this century.

However, in many cases borrowers were allowed to sign up without demonstrating how they would square off the debts decades later. The Financial Conduct Authority last year warned that 1.3 million people may be forced to sell their home, having taken mortgages which they now have little or no hope of repaying at the end of the term.

Mark Harris, chief executive of mortgage broker SPF Private Clients,  states that “Interest only mortgages have fallen out of fashion, with many lenders no longer offering them or significantly restricting their criteria.”

The Clydesdale and Yorkshire banks have been offering a three year interest only deal through mortgage brokers since January. The deal has a rate of 2.69 per cent and after the three years, borrowers must then start repaying the debt.

After three years the customer moved to a repayment basis on the standard variable rate offered by Clydesdale and Yorkshire banks, which is currently 4.95 per cent.

The bank group has now opened its doors to customers who approach it direct.

The new deal offered by Clydesdale and Yorkshire banks could represent a lifeline to some. It is available on loan to value (LTV) of up to 80 per cent. But it does come with a £999 arrangement.

A spokesperson from the lenders said “Low start has been designed to meet this specific need within the market for a mortgage which initially offers lower payments, but also provides the peace of mind that the full loan will be paid off over the term.”

David Hollingworth, director of London & Country mortgage broker, said: “This is not a return to the days where interest only mortgages were available to everyone. But it does give some flexibility to those who would otherwise struggle.”

Ray Boulger of mortgage broker John Charcol also added that “Lenders are becoming more comfortable about lending now that the property market has stabilised. We will see more options for interest only borrowers over the next two years and I am aware of one lender looking into a five year deal.”

Despite this some financial experts view the emergence of deals such as these as fresh evidence that the property market is heating up and fuelling the risk of a new housing bubble.



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