Is There a Future for Interest Only Mortgages?

by Mark Johnston

                           Is there a future for interest only mortgages?

Before the financial crisis began interest only mortgages were very much viewed as a fast track to home ownership and in 2007 33% of residential mortgages were sold on an interest only basis.

However, in recent times these mortgages seem to be becoming a thing of the past. While it is still possible to get an interest only mortgage, these are now subject to the level of equity in the property and the repayment vehicle that will be used.

Lenders have been tightening their criteria in recent months and they are also getting a lot stricter about what constitutes an acceptable repayment vehicle. They therefore now require regular updates on whether or not the repayment vehicle is on track.

Some experts believe that looking at house prices over the last few years and indeed the last few months, relying on equity from house price rises would now be very foolish, certainly in the medium term.

The Financial Service Authority (FSA) has confirmed that it will not be banning interest only mortgages as part of its Mortgage Market Review (MMR), as some lenders first thought would happen.

Lynda Blackwell, mortgage policy manager for the Financial Service Authority (FSA), said “our view is that interest only is suitable for certain borrowers. We have said to lenders that we want them to make an informed judgement on the matter”.

Despite this the Nationwide along with its other building society brands such as the Derbyshire,CheshireandDunfermline, has recently tightened their lending criteria for interest only loans and they now demand that new borrowers have at least 50% loan to value (LTV) ratio.

David Hollingworth, ofLondonand Country mortgages said this move by the Nationwide was “the latest nail in the coffin of interest only”.

Mark Harris, chief executive of SPF Private Clients, the mortgage broker, said “it is a shame for borrowers that Nationwide have introduced these restrictions, but no real surprise. Its like a pack of cards; one lender folds and the others inevitably follow”.

Mortgage borrowers wanting an interest only loan with the Co-operative bank or its sister brands Britannia and platform will find it hard as they have decided to withdraw from this part of the market altogether and will only now offer repayment mortgages to new customers.

These lenders are not alone though as several other lenders are to make it more difficult for anyone wanting to obtain an interest only loan. Santander have reduced their maximum loan to value (LTV) ratio to 50% and Lloyds banking group will no longer accept cash savings, including ISAs as a credible repayment vehicles. It will only accept ISAs or endowments as long as the borrower has at least £50,000 invested and even then they will only be allowed to borrow up to 80% of the value of that investment.

While interest only deals are only suitable for a minority of borrowers, there is still a feeling amongst many that the latest changes are effectively ruling out interest only as an option.

Story link - Is There a Future for Interest Only Mortgages?

Related stories to : Is There a Future for Interest Only Mortgages?