Lenders introduce changes to interest-only mortgages

The face of interest-only mortgages looks set to change as both Lloyds Banking Group and Santander announced new restricted criteria for their interest only loans this week. Whilst Santander have cut their interest only LTV from 75% to 50%, Lloyds have introduced a host of new changes which will make interest only deals more difficult to obtain.

This is following worries sparked by a review of the market that many borrowers are not able to repay their capital investment at the end of their mortgage period, leaving them in serious debt and leaving the lender with no way to recoup the money lent out in the first place.

Lloyds have cut their lending to 80% of the value of the repayment vehicle (meaning an ISA worth £100,000 will only give the borrower £80,000 of borrowing from the bank) and have ruled that any investment vehicles must hold at least £50,000 to be eligible.

Whilst the sale of the property itself is not accepted as a means to repay the investment, the sale of a second property may be used to repay the mortgage, but it must still have a minimum value of £50,000 of equity for the bank to accept it. Cash savings are also no longer considered a viable repayment option and Lloyds will be making sure that all borrowers have an appropriate repayment vehicle set up before deciding to lend at all.

This more cautious approach to interest only mortgages protects both the buyer and the lender in the long run but may cause a number of new buyers to re-evaluate their situation when it comes to getting an interest only mortgage, as the strict conditions should make it far more difficult to get an interest only loan in the first place - and even if they can get one they will need to prove that they can pay back the full amount.

In this case, many borrowers may want to look into getting a full repayment mortgage instead, which will allow them to pay off both the interest and capital investment at the same time, saving them the trouble of worrying about whether they can afford to pay back the full loan at the end of the repayment period.

Whilst other major banks have not tightened their restrictions on interest only, across the board the rules are tight when it comes to this type of lending, making it one of the most difficult types of loan to take out.

Article by: Ben Goble, Senior Mortgage Consultant at Contractor Mortgages Made Easy

Media Contact: Raman Kaur, Public Relations Manager.

Tel: 0844 44 88 800
Email: media@contractormortgagesuk.com