Thousands of homeowners with interest-only mortgages may be stuck on their existing deal when their introductory offer ends, paying far more each month in future.
Many who took such deals due to their low monthly payments can't switch to a cheaper loan because lenders now restrict who qualifies for an interest-only mortgage.
- Many stuck on existing interest-only mortgages, paying far more
- Tougher rules mean they no longer qualify for a similar deal
- Brokers urge them to switch to a repayment mortgage ASAP
Monthly payments will often rise by hundreds of pounds a month after a promotional deal ends.
Brokers suggest it's prudent to move as soon as possible to a repayment mortgage (where payments also clear the loan) which come with less strict qualifying conditions, because borrowers will need to pay the capital eventually.
However, not everyone can afford to as monthly payments are higher.
Many on interest-only mortgages gamble that they can sell their home to eventually clear the debt but this is fraught with danger given house prices may fall.
Tough mortgage conditions
The stricter criteria won't be disastrous news for all borrowers given some lenders' standard variable rates (SVR), what most loans revert to after an introductory period, are at record lows.
Some Lloyds TSB and Nationwide customers, for instance, pay just a 2.5% SVR. On a £150,000 interest-only home loan, that costs £313 a month.
But not everyone is so lucky. An interest-only borrower on a typical £150,000 mortgage paying 3% interest, who is then moved to a 4% deal, which is a typical SVR, faces a £125 rise in monthly costs from £375 to £500.
Those who want to switch to cut costs may be stuck for two primary reasons:
- Most lenders now only lend up to 75% loan-to-value (LTV) on interest-only, compared to 95% on a standard loan. Those primarily affected are homeowners who originally borrowed at a higher LTV, who won't have eaten into any of the capital, or those whose property value has dropped so they have less equity.
- Most lenders demand evidence of an adequate repayment vehicle. Where they would previously ask whether or not borrowers have a plan to pay the capital, they now seek proof savings are in place. Many have also cut the number of acceptable repayment vehicles. So those who got by on the old system may not be so fortunate.
The UK's largest lender Lloyds Banking Group (which includes Halifax and Lloyds TSB), allows up to 75% LTV on interest-only, compared to 90% on repayment. Before changes it made in 2010, Halifax allowed up to 85% on interest-only.
Also last year, the group removed the following as acceptable repayment vehicles: sale of a business, sale of mortgaged property and an inheritance. This is typical in the industry.
Lenders are tightening restrictions because the regulator, the Financial Services Authority, has demanded they take a firmer assessment of borrowers' ability to repay.
The percentage of borrowers who have taken an interest-only mortgage has steadily fallen over the past few years, from 30% in 2008, to 22% in 2009, down to 18% last year, according to figures from the Council of Mortgage Lenders.
What can you do?
David Hollingworth, from broker London & Country, says in most cases those with an interest-only mortgage who are unable to switch to a similar loan, must stick with their current deal if they cannot afford a repayment mortgage.
In some cases, he says it is possible to switch to a deal that is part repayment/part interest-only to get a higher LTV mortgage. Some banks, for example, lend up to 75% on interest-only and the remainder on repayment.
But he stresses: "If you don't have a repayment vehicle you need to think about how to repay the mortgage so switching to repayment is probably a sensible move. The sooner you take action to repay the better."