One million homes face Interest-only remortgage threat

Published 11th Aug 2010

More than one million homeowners on interest-only mortgages face a repayment timebomb when they next come to remortgage.

Interest-only loans are increasingly difficult to find as lenders tighten criteria ahead of a crackdown by the City regulator.

Last week Coventry Building Society stopped offering them to first-time buyers.
Other lenders are being similarly picky after the Financial Services Authority (FSA) raised major concerns over the sale of interest-only mortgages back in July.

More than a million homeowners with no loan repayment plan were sold interest-only mortgages between 2005 and 2009, according to the FSA.

The regulator is worried these borrowers are sitting on a mortgage time bomb, due to explode between 2024 and 2033, unless they devise a way to repay the capital.

‘Borrowers need a plan to repay the capital that does not rely on house price inflation or unrealistic intentions to downsize to a smaller property at the end of the term,’ the FSA says.

But their problems could begin even sooner — if they are not allowed to take out a new interest-only loan and are forced to take out a repayment deal.

Melanie Bien, of broker Private Finance, says: ‘Borrowers are under increasing pressure to switch to a repayment loan.

‘But the monthly cost of a repayment mortgage is far higher than interest-only, so if lenders stop offering interest-only options, borrowers may be unable to remortgage.

‘This could mean going onto their lender’s standard variable rate (SVR), rather than remortgaging to a fix or tracker, which could become unaffordable when interest rates start to rise.’

Interest-only mortgages mean borrowers’ monthly payments cover only the interest on the loan, not the loan itself.

On a typical £150,000 mortgage at 5 per cent, monthly payments would be £625 instead of £877 on a repayment basis.

But, at the end of the mortgage term, the homeowner has not repaid any of the capital in their home.

Now most lenders will insist borrowers prove they have an alternative investment in place, such as an insurance or investment policy, to cover the outstanding loan at the end of the mortgage term.

While Coventry is currently the only lender explicitly to exclude first-time buyers from interest-only mortgages, other lenders make it near-impossible for these borrowers to qualify.

Nationwide, for example, says you must have at least £150,000 equity in the property and borrow no more than 66 per cent of the property’s value.

Santander will only allow interest-only borrowing on up to 75 per cent loan-to-value, while Lloyds Banking Group, which includes Halifax and Cheltenham & Gloucester, makes interest-only mortgages more expensive and only available up to £500,000.

Lloyds also writes to its homebuyers with interest-only mortgages every year to ask if they have sufficient funds to pay off their home loan.

If the borrower hasn’t got some sort of regular savings plan in place, Lloyds will try to persuade them to move on to a repayment loan.

Ms Bien adds: ‘Repayment mortgages offer more security than interest-only, but forcing everyone on to one, regardless of circumstances, is not realistic.

‘Discriminating against first-time buyers is also short-sighted as these borrowers come in different shapes and sizes. Some may struggle, but those in good jobs with low incomes and big bonuses are a different proposition.’

The FSA is currently consulting on whether or not tighter regulation is required on the sale of interest-only mortgages.

It is likely that any new rules, such as the requirement for new borrowers to have a loan repayment plan, would be announced early next year.

Source: ' Daily Mail '

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