Is the interest-only mortgage dead?

David Hollingworth
London & Country
23 April 2012

Lenders have made it so hard to get an interest-only mortgage, leaving some to question if it's still possible to get one of these home loans. David Hollingworth (right), from broker London & Country, explains...

Mortgage borrowers in the UK are well aware of the tough lending conditions that have dominated the market in the last few years.

Banks and building societies have limited their level of lending and tightened their criteria so that getting a mortgage has become significantly harder than in the boom years before the credit crunch.

In fact, far from there being light at the end of the tunnel, the goalposts are still moving as lenders continue to make changes to their lending criteria.

The most notable example is the renewed focus on interest-only lending, an area that has already been subject to change. These are mortgages where you only pay the interest until the term ends, when the debt itself must be repaid.

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Huge deposits required

The market had already limited the typical maximum loan to value (LTV, the mortgage amount as a percentage of the property price) for interest-only to 75% a couple of years ago.

That limitation had become pretty standard practice, but took another turn when one of the largest UK lenders, Santander, announced earlier this year it would impose a maximum 50% LTV on all new interest-only lending. That means you'd need a 50% deposit.

Nationwide, Coventry and Leeds building societies followed suit. A cliff edge approach has been employed, so if the mortgage is greater than half the property value, the whole mortgage must be taken on a repayment basis.

ING Direct also imposed a 50% limit last week but has at least left some room for manoeuvre by allowing as much as another 30% to be topped up on a repayment basis.

Some, such as NatWest, have left the LTV restriction at 75% but decided to only offer interest-only to a limited customer profile. Manchester BS has even taken the step of removing interest-only as an option for new borrowers.

Tougher repayment checks

Many lenders have left their maximum at 75% loan to value, but toughened the requirements for acceptable repayment vehicles, as borrowers must prove they are saving to pay the debt off.

For example, Halifax now requires an equity Isa fund to be at least £50,000 and even then will only use 80% of the current value to decide the allowable level of interest-only borrowing. If a pension is to be used, then the pot must currently be at least £1 million.

These changes add up to a severe tightening around interest-only lending and will force many borrowers to rethink their repayment strategy. Depending on the repayment vehicle and/or the LTV, there may be limited options available when they come to remortgage.

These changes are not a few isolated cases, and there are likely to be further changes as this becomes another wholesale shift in the market.

That trend is only likely to gather pace as lenders become increasingly concerned they will be the last man standing, and as a result will attract too much interest-only business that they cannot handle.

The bottom line is that repayment mortgages will represent an even larger majority of new mortgage lending.

Existing interest-only borrowers should consider the impact of the criteria changes to see how they will fare in future and hopefully act to limit the risk of becoming a mortgage prisoner.

So is interest-only dead? If not yet extinct, interest-only mortgages are certainly on the critical list and fast becoming a niche product.

Views are not necessarily those of MoneySavingExpert.com.

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