The noose on interest-only mortgages tightens

Two more lenders have reigned in their offering of the specialist mortgages

More lenders have heightened the pressure on interest-only mortgage customers.

From next week, HSBC will only offer the loans to customers of its Premier Bank Account. To qualify for the account customers need an income of at least £100,000 a year or £50,000 in savings.  

Existing customers on the bank’s interest-only mortgages won’t be affected, unless they want to remortgage.

Also from next week, Yorkshire Building Society will close the door to all new interest-only residential customers. 

Both Nationwide and the Co-operative Bank withdrew from offering interest-only mortgages last year. 

Industry experts have recently voiced concern about older borrowers on the deals, who have less time and earning potential to repay.

A quarter of all over-60s with mortgages have an interest-only deal, according to Moody’s. 

The ratings agency has warned that if interest rates rise in a couple of year’s time, older borrowers with the mortgages could start to default.

The situation has been dubbed a ticking bomb which could see hundreds of thousands of borrowers default on the loans when they come to fruition from around 2016 onwards.

Jonathan Harris, director of mortgage broker Anderson Harris, commented:

“There are certain areas of lending which are increasingly difficult and are set to become even more so, such as interest-only mortgages and loans for older borrowers.

"Part of the problem for older borrowers with interest-only mortgages is how they are going to repay the capital at the end of the term. Many will have endowment policies or other investments which may be under-performing, so this will need to be addressed.”

As the name suggests, interest-only mortgages only require the interest on the loan to be repaid over the duration of the deal, which makes repayments considerably cheaper. The rest or capital part of the loan is due for repayment at the end of the term.

However, some loans issued before 2008 were granted without any checks that borrowers could pay back capital at the end.

The Financial Services Authority reckons that about one in three mortgages sold in 2007 was interest-only, but three-quarters sold have no reported plan of how they will repay the capital. As many as 3.9 million are thought to have the loans.

It was largely assumed that rising house prices would provide the equity needed to repay the capital.

But as home values have dipped across much of the country since 2007, this doesn’t look to be such a safe bet.

This also creates a problem for people with interest-only deals who want to move on to a capital repayment mortgage, as these typically require a deposit of at least 10% of the home’s value. 

With lenders pulling out of the market, customers on the deals have also been left with few options if they want to remortgage. 

The handful of providers still offering interest-only mortgages typically demand a deposit of half the home’s value.

Many whose fixed-term interest-only deals have come to an end have been shifted on to their lender’s Standard Variable Rate (SVR) and, without any other option, are left at the whim of any increases.

Trade body the Council of Mortgage Lenders is working with members to identify and mitigate repayment risks, but no one really knows just how big the problem is set to become.

Were the loans mis-sold?

Though there has been talk of the loans being ‘mis-sold’, at the moment redress looks doubtful. It was irresponsible to give so many borrowers the mortgages without checking the means of capital repayment, but most borrowers are thought to have understood the terms of the mortgage and, therefore, were not mis-sold.

If you’re on an interest-only mortgage and worried about repayment of the capital, you should talk to your lender. You might be able to split your loan between capital repayment and interest-only.

The FSA is set to put a number of rules next year to ensure that interest-only mortgages don’t make a mainstream return.

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