Interest Only Mortgage Crunch Time

by Mark Johnston

Before the banking crisis, one in three home owners took out interest only mortgages. These mortgages are where the borrower pays just the interest on their mortgage and therefore none of the capital.

Interest only mortgages are typically sought by the self-employed, couples getting close to their retirement age or households in which one partner has taken a career break to raise a family.

In 2007, at the height of the market, around 251,000 people re-mortgaged on to an interest only deal with out having a specific way of repaying the loan at the end of the term.

There has however been a dramatic fall in the number of interest only mortgages approved in recent years and according to the Council of Mortgage Lenders (CML) this number fell to just 51,500 in 2011.

It seems then that now mortgage lenders are making it harder but not impossible for home owners to take out an interest only mortgage.

David Hollingworth, associate director at London and Country mortgage brokers, said “interest only deals are being squeezed at the moment”.

Santander, one of the UK’s biggest mortgage lenders has cut the maximum it will allow customers to borrow on an interest only mortgage from 75% to 50% of a property’s value. This comes just 4 years after it was handing out interest only deals to buyers with out any deposits.

Lloyds TSB, Cheltenham and Gloucester and the Halifax are all now asking for at least a 25% minimum deposit for an interest only mortgage.

Mark Harris, chief executive of mortgage broker SPF private clients, stated “this is a hugely disappointing move, but it is no surprise. It is like a pack of cards, once one lender tightens its interest only policy as Santander did, then the others will inevitably follow”.

1.5 million People now face a ‘timebomb’ in the next decade as their mortgage terms come to an end.

The Financial Services Authority (FSA), the city watchdog, is worried that many of these people have no way of repaying the capital.

The draft regulations that have been produced by the FSA have put a great deal of responsibility on lenders to ensure that any investment plan borrowers have will provide sufficient funds to pay off their mortgage.

In light of this Lloyds stated “we review interest only criteria and risk controls on an ongoing basis. Following recent changes in the market, we have updated the policy for acceptable repayment vehicles”.

Changes in the eligibility criteria for these mortgages have also meant that borrowers who already have an interest only mortgage but wish to move home are finding their options severely limited. These borrowers have to meet the tougher standards or change over to a capital repayment mortgage, meaning that they may find themselves becoming trapped in their current homes.

Ray Boulger, senior technician at John Charcol mortgage brokers believes that this “means less activity in the housing market and that’s bad for the UK economy as it affects everyone in the chain”.

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