Metro - 18 October 2012
By Jo Eccles
Within the past two weeks there have been some major changes in the mortgage market, most notably, Nationwide being the latest big lender to reduce the availability of interest-only mortgages.
Earlier this year, Nationwide made the move of limiting interest-only mortgages to those borrowing less than 50% of the value of their home. Now they have ceased offering interest-only mortgages to new customers or allowing existing interest-only borrowers to take on more borrowing on interest-only terms.
Other lenders have already made similar moves, with RBS refusing to lend to first time buyers on an interest-only basis, and others setting maximum loan amounts versus the cash amount being put down.
Interest-only mortgages do not repay any of the mortgage amount and they have been hugely popular with many borrowers, because they are much cheaper than mortgages where you pay off a portion of the loan amount each month. There was a particularly large uptake between 2000 and 2007, when house prices were rising rapidly and banks relaxed their lending requirements.
The problem with this clamp down kicks in when you want to move house or increase your existing mortgage. In this case, many borrowers are being told by their lender that they can do so only on a repayment basis.
Often this option is too expensive. In fact, a lot of home owners who currently have interest-only mortgages claim they would struggle to afford their current mortgage if they were forced to switch to repayment, let alone increase their mortgage amount to enable them to upsize or extend their current home.
In some ways these moves by the lenders is a sensible one, as many argue that interest-only mortgages allow borrowers to stretch well beyond their means and the housing market shouldn’t be propped up by loans which most people simply can’t afford to repay. However, there are some borrowers who can afford these types of loans in a sensible manner, for example those who are paid in bonuses, or an entrepreneur who will be selling his company – these types of borrower can often afford to repay the loan amount at a later date. For those of us who can’t, we need to be aware of the changing mortgage landscape and make provisions now to avoid any nasty surprises later on.