Thousands face interest-only mortgage crunch due to tough lending checks
Hundreds of thousands on interest-only mortgages may be unable to take a new deal or move home due to tough lending checks.
Anyone with less than 25 per cent equity or little savings may be forced to switch from interest-only to a repayment mortgage — adding hundreds of pounds to their monthly bill.
The warning comes as Britain’s second largest mortgage lender, Santander, started demanding a 50 per cent deposit from anyone who wants an interest-only deal.
Roll of the dice: Before banking crisis, one in three took interest-only mortgages
This comes four years after it was handing out interest-only deals to buyers with no deposit.
Before the banking crisis, one in
three homeowners took out interest-only mortgages, where borrowers pay
just the interest on their loan and none of the capital.
But, now, 1.5 million face a timebomb in the next decade as their mortgage term comes to an end.
The Financial Services Authority (FSA), the City watchdog, is worried many of these people have no way of repaying the capital.
The big attraction of these mortgages
is that the monthly payments are cheaper than with a repayment loan. On a
150,000 mortgage at 5 per cent, monthly payments on interest-only
would be 625, but 877 on full repayment.
Borrowers on interest-only deals would need to have some way of buying their home outright once the mortgage term ends.
Many borrowers were relying on house
price growth to pay off their home. Others took out endowments, or were
depending on an inheritance.
But all banks have cracked down on
interest-only deals in the past few years. It means that existing
interest-only customers who want to move home, or switch to a cheaper
deal at another bank, may find that they can no longer borrow in this
way.
‘Interest-only deals are being squeezed,’ says David Hollingworth, associate director at London & Country mortgage brokers.
‘Those who took out mortgages before the credit crunch may now find their options more limited.’
Last month, Woolwich, part of
Barclays, became the latest lender to demand evidence of the specific
investment that interest-only borrowers will use to repay their loan.
Meanwhile, at Barclays, this can be an endowment, shares or a unit trust.
If customers plan to sell their home to pay off the loan, they must have 150,000 equity or 34 per cent to qualify.
Nationwide, Northern Rock and ING have similar policies.
Most banks ask for evidence that homebuyers are saving, such as an Isa or endowment policy document.
The FSA also wants banks to check how these investments are performing at least once during the mortgage term.
In 2007, at the height of the market,
251,000 people remortgaged onto an interest-only deal without specifying
any way of repaying the loan.
In 2011, the number had fallen to just 51,500, according to trade body the Council of Mortgage Lenders.
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