Interest only mortgage – what is the future

Interest only mortgage policy changes

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Where is interest only going?

Abbey Santander today announced they are changing their policy on interest only mortgage applications.

They said:

‘We constantly review our offering to ensure it best meets the needs of your clients and following a review of our interest criteria we have taken the decision to reduce our maximum LTV on our residential mortgages where any loan part is on an interest only basis to 50%.’

This means that any borrower who wants to have any part of their mortgage on an interest only basis with Abbey Santander in the future cannot borrow more than half the value of the property.

What is an interest only mortgage?

Under an interest only mortgage arrangement, the borrower services the ‘interest only’ on a mortgage loan each month.(Under the more traditional arrangement of capital repayment a repayment of capital is made each month in addition to servicing the interest).

What does this action by Abbey mean for the future of interest only mortgages?

We have seen all Mortgage Lenders becoming more restrictive in their approach to interest only mortgages in recent years. Most now will not consider interest only mortgages for loan to values over 75%. Abbey is the first major player to reduce this figure to 50%.

Whether this 50% figure will also apply to their offset mortgages is not yet clear. (offset mortgages are often set up on an interest only basis and the funds in the offset account have the effect of paying down the capital element if set up in the right way).

Will Nationwide, Halifax, and Barclays Woolwich follow Abbey’s lead? – that will very much depend on how borrowers react to this.

Clearly clients who want to use interest only above 50% loan to value will not now be offered Abbey Santander products as a potential solution. During the last 12 months Abbey have been competitive on rates in the 60% to 75% loan to value range and that may no longer be enough to maintain their levels of business. This could leave room for Nationwide, Halifax, and Barclays Woolwich, to pick up the slack without having to be aggressive on pricing. This is clearly not good news for borrowers.

What if I already hold an interest only mortgage above 50% – should I worry?

If you already hold all, or part of your mortgage on an interest only basis you should already have some kind of repayment vehicle arranged, be that ISA’s, pensions, inheritances, bonuses, shares portfolios, or sale of property

– That has not changed.

Abbey have not said that existing borrowers will be affected and Lenders do not, as a rule, apply new criteria to existing clients. This type of policy may cause an issue if you intend to move and wish to port your product.

If you are unsure about how these type of policy changes may effect you, get independent mortgage advice.

If you require help or advice with an interest only mortgage – contact us now.

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