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Interest-Only Mortgages are Almost Extinct

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Nationwide are the latest lender to announce the end of interest-only mortgages; it won’t be offering the product to new borrowers from 11th October.  Last year the Financial Services Authority (FSA) announced that from 2013 it would enforce new rules to ensure that lenders scrutinised their potential customers more closely.  This will include making sure that those taking out interest-only mortgages have a suitable investment in place to pay back the capital at the end of the loan term.

The product has come undone because, in the past, some borrowers have seen this type of mortgage as a more affordable option, without worrying about how they would pay it back.  The fact that banks are now going to have to do much more checking up on those who want an interest-only mortgage is clearly making it more hassle than it is worth.  In May, the Co-op Bank took a similar step and other lenders, such as Santander and HSBC are demanding a 50% deposit for the product.

The fact that Nationwide, one of the country’s biggest mortgage lenders, has scrapped interest-only mortgages, will not be lost on other lenders – so expect to find others following suit.  Figures from the Council of Mortgage Lenders suggest that banks have already been cutting back on the product; in 2011, 96% of all new loans to first-time buyers were on a traditional repayment basis.  Compare this to 1988, when only 12% of first-time buyers had such loans.

A worrying trend for those who are currently on interest-only home loans is the fact that lenders are keen to switch them onto a repayment mortgage.  In a nutshell, this means that if a borrower stays in the same property on the same mortgage, he/she can keep those low interest-only payments.  However, if the borrower then wants to move home or extend the mortgage, the lender will insist on the switch.  On an interest-only deal that has got 15 years to run, based on a £125,000 mortgage, switching to a repayment loan could result in the homeowner having to stump up an extra £500 per month.  That’s a big hole in anyone’s budget.

Sources: bbc.co.uk, nationwide.co.uk, thisismoney.co.uk (image courtesy of guardian.co.uk)