by Mark Johnston
Interest Only Mortgages: Who Still Lends?
Many major lenders have recently pulled out of the interest only mortgage market, this has been sparked by a crackdown on affordability checks which is due to come in to force next year.
Nationwide building society, Natwest bank, the Royal bank of Scotland (RBS), Coventry building society and also Newcastle building society completely stopped accepting new interest only mortgage applications last year.
The Yorkshire building society and the HSBC have now become the latest lenders to restrict interest only mortgages.
The new rules, enforced by the Financial Conduct Authority, which come in to force in April 2014 will mean that lenders will have to ensure that all borrowers have plans in place to repay their loan and also these plans are credible.
These particular rules came about after concerns were raised that during the property boom some buyers took on interest only loans without making any provisions to cover their borrowing.
At the height of their popularity, interest only mortgages accounted for more than 80 per cent of all mortgage loans.
However, the Council of Mortgage Lenders (CML) now reckons that interest only mortgages currently make up fewer than one in ten of new mortgages. Nevertheless there are still an estimated 3.8 million interest only home owner mortgages are still outstanding.
All this said the Financial Conduct Authority (FCA) is now concerned that the exodus from these particular loans now means that ordinary people will find it impossible to get an interest only mortgage.
Martin Wheatley, head of the Financial Conduct Authority (FCA), says “there are two sides to the risk equation, consumer detriment arising from the wrong products ending up in the wrong hands and the detriment to society of people not being able to get access to the right products”.
David Hollingworth, of mortgage brokers London and Country, states “the trouble is, that if existing interest only borrowers want to re-mortgage on to a better rate with a different lender they will struggle”.
There is however still light at the end of the tunnel for some borrowers:
The HSBC will still accept interest only borrowers but this is providing that they have an income of over £100,000 or £50,000 in savings with the bank.
Santander bank also still offer interest only mortgage deals, but they will only lend up to 50 per cent of the value of any property and borrowers will also need to have a minimum of £100,000 to £300,000 in equity.
The Clydesdale bank offers a slightly different deal, they will allow borrowers to start their mortgage on an interest only basis and then they move them on to a repayment mortgage after 3 years.
So it does seem then that borrowers who want to re-mortgage particularly to a new lender will need to build up equity of at least 40 per cent.
James Cotton, of mortgage brokers London and Country, adds that “options are limited, so the safest thing is to move to a repayment mortgage if a borrower can afford to”.
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