I’m worried about my interest-only mortgage which is due to expire
Q: My interest only mortgage comes to an end in January 2014 and I’m wondering what might or might not happen when it expires. What are my best next steps?
What impact will recent changes to regulation of interest-only mortgages have
Lending criteria has tightened substantially since the credit crunch hit and an area that has very definitely been under the spotlight is interest only mortgages. The Mortgage Market Review conducted by the Financial Services Authority recently made it a key focus and whilst it doesn’t prevent lenders offering interest only it does tighten up the rules.
Even before the review was published the market had already pre-empted the new rules and toughened up the criteria for interest only. Lenders have reduced the maximum proportion of the property value (known as loan to value or LTV) that they are prepared to lend, in some cases to only 50% of the property value.
In addition many are far more stringent around what they deem to be an acceptable repayment vehicle. For example, the use of cash savings to overpay, future inheritance and sale of the property are in most cases not accepted as a suitable repayment vehicle. Lenders want to see traditional investment plans such as equity ISAs, endowments or pensions but even then can be much tougher in their demands. For example Halifax requires there to already be at least £50,000 in an equity ISA fund to consider it and will then only take 80% of the current fund value.
More recently a number of major lenders have totally withdrawn from interest only. That now means that Nationwide, Co-operative, RBS and Coventry will no longer entertain interest only lending for new lending. Barclays has imposed a £300,000 minimum mortgage size for interest only lending to be a possibility.
So the picture is very much harder for interest only borrowers and even those with an existing repayment vehicle may find that their mortgage options with other lenders will be limited if they want to keep their mortgage on an interest only basis. That could result in borrowers having to leave their mortgage with the existing borrower or rethink their repayment strategy by switching part or all of the mortgage to a repayment basis.
I expect interest only to be a niche product going forward. Therefore borrowers should think about how they want to play it.
You might prefer to switch to repayment having used your current investments to reduce the mortgage size. Alternatively it could help improve your interest only options to reduce the loan to value by overpaying. Contact your mortgage lender now and get advice on making over-payments over the next year and whether there are any penalties for doing so (although most lenders will have an allowance up to approximately 10%).
As the end of your mortgage term approaches, see what your existing lender says and then assess against what else is available in the open market.
David Hollingworth, London & Country Mortgages
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