Death of interest-only mortgages?

Santander branchDave Thompson/PA Wire/Press Association Images

Santander has dealt the first big blow for interest-only mortgages, insisting that anyone who wants one with the bank has to have a 50% deposit or 50% equity in their home.

So why has the bank taken this step, and what does it mean for interest-only?


Risky

Santander has made the decision in order to protect its interests. This sort of deal was popular at the height of the boom. House prices seemed to be climbing higher by the month, so homeowners stretched their mortgage as far as they could, and relied on the rising value of the property to enable them to downsize and pay off the mortgage at a later date.

However, the subsequent house price falls mean many have been left in negative equity, and many thousands more are left owing money they can never imagine being able to pay off.
The bank aims to take these people off its books.
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Customers

If you have an interest-only mortgage with the bank and you need to remortgage after a deal has expired, this could cause a real headache. If you don't have the required equity in your home, you may have to find the extra cash for a repayment deal, or move your mortgage elsewhere, at considerable cost and inconvenience.

The risk for those who plan to move their mortgage is that this is unlikely to be the last lender making this move. At the very least we can expect the rest of the high street to take a long, hard look at their lending policy. In the past they may have been comfortable lending 75% on an interest-only, but they may want to reconsider whether they are happy with the risk.

In addition, they may take a stricter view of the vehicles they will allow borrowers to declare as their repayment method. Inheritance or an increase in house prices will not be allowed as repayment strategies, and even equity ISAs may not be considered suitable, unless the individual is prepared to assume that the ISA isn't going to grow at all through investment gains during the mortgage period.

In the medium-term, a review of the mortgage market and new regulations may well mean an end to this sort of deal for the vast majority of borrowers anyway, as the new rules mean most people cannot qualify for one.

This could well be the first nail in the coffin of the interest-only mortgage.

Too far?

And while there will be people who are glad to see the back of this kind of mortgage, there are others for whom it has been an invaluable solution. Plenty of people moved to an interest-only deal for very sound financial reasons.

If the deal allows for overpayments, they could pay into their mortgage as if it was a repayment mortgage. If interest rates stayed low, they would effectively pay it off in exactly the same way as a repayment deal. However, it gave them added flexibility that if interest rates went through the roof or their income took a massive blow, they had the opportunity to switch back to interest only without penalty.

So what do you think? Will you be glad to see the back of a risky product, or is this a bit shortsighted? Let us know in the comments.

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