Re-mortgaging and Interest Only

by Mark Johnston

 The next instalment of look at 2011 will be looking at re-mortgaging prospects and the future of interest only loans. Following our recent features on the mortgage market in 2011 and the UK economy together with a look at the impact of any future base rate increase4, many borrowers are probably thinking about finding a new mortgage deal.

Those borrowers with 25% equity or more in their property should think about looking for a re-mortgage deal. There is still competition in the market so lenders are offering some great deals. Any borrowers who decided to stick on their lenders standard variable rate (SVR) who are paying 3% or more should also look to secure themselves a better deal. Any one in either scenario will be able to get a much better rate than they are currently on.7

Some borrowers may be on interest only mortgage, the FSA’s mortgage market review may well try and limit the offering and some lenders have even stopped providing them. Until then though even those on interest only mortgages will be able to find a good deal. Most providers are staying well clear of borrower with interest only mortgages who have little equity although some will offer i8nterest only mortgages about the 75% mark so long as they take anything above 75% as a capital repayment loan

The FSA’s review will look to tighten the rules relating to interest only mortgages and will force lenders to make sure their customers have a solid repayment plan in place.  The concern is that around 10% of all interest only mortgage holders have no plan or means to pay back the loan. In the past these borrowers have relied on the market moving in their favour and the price of the property to go up. This was they can downsize at a later date paying off their loan with cash to spare. Following the financial crisis, the housing market has struggled and has dropped in value. With further drops in value of up to 20% in 2011, the city regulator is hoping they can control the impact this has by tightening the regulations around selling these types of loans.

Interest only mortgages aren’t all bad and many borrower use them to great advantage. Lots of people have other means of paying off their mortgages and interest only mortgages offers them the flexibility of doing this. Others also use them on a temporary basis when times are hard. Moving onto this type of loan can reduce monthly payments for a while until things improve.

Those looking for an interest only in the current climate may need to search well. Many lenders will only accept either and endowment policy or an investment product like a PEP or an ISA as a means to pay off a mortgage. This creates a lot of risk for the mortgage provider so they look to minimise this by asking for large amounts of equity to be held in the property.

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