The end for interest-only mortgages?
The group, which includes Lloyds TSB, Halifax and Cheltenham & Gloucester, has issued strict criteria for interest-only products by limiting the assets it will accept to repay a loan at the end of the mortgage term. So is this the beginning of the end for interest-only deals?
The move follows the recent decision by Santander to insist that interest-only borrowers have a 50% deposit or 50% equity in their homes. Santander was the first provider to issue such strict rules and it seems now other lenders are set to follow suit.
Lloyds' new rules are particularly stringent: completely excluding many borrowers by no longer accepting cash savings as a mortgage repayment vehicle, and requiring a 20% margin of safety in the valuation of other assets such as shares, ISAs and other property.
Lloyds also demands that repayment vehicle assets have a minimum value of £50,000. The bank states that for stocks and shares Isas, unit trusts, investment bonds and shares, the current fund value must be over £50,000 and up to 80% of the current fund value can be used.
Borrowers wanting to repay the loan by selling other residential property must have equity with a current value of more than £50,000 and up to 80% of current equity can be used. For pensions, the current fund value must be more than £1m and up to 25% of the current fund value can be used.
Unlike the Santander decision, the minimum deposit or equity required for interest-only loans is unchanged at 25% across the Lloyds brands.
End of interest-only?
The new rules from Santander and Lloyds bar tens of thousands of borrowers and demonstrate how banks are desperately trying to avoid a repeat of the losses accrued as a result of widespread interest-only borrowing at the height of the property boom.
When house prices were on an upward climb, banks were confidently lending to individuals with no repayment vehicle in place, relying on rising property values to enable borrowers to pay off the mortgage at a later date. When house prices dropped, many borrowers found themselves in negative equity – where the mortgage is greater than the property value – and unable to clear the debt.
The changes reflect guidance issued in the Mortgage Market Review published by the Financial Services Authority before Christmas, stating that lenders must take more responsibility at the point of sale to ensure borrowers have a suitable repayment strategy in place. However the recent moves show lenders are refusing to take any risk whatsoever, which is constraining the market and excluding a responsible minority of borrowers.
The recent changes suggest interest-only is on the way out unless the FSA reviews its proposals to allow interest-only to exist as a niche part of the market, but not as an everyday choice for borrowers.