From the 13th May 2010 the Lloyds Banking Group will be imposing new conditions on interest only mortgage deals. This follows an increase of 0.2% on the rates offered by the group in March for these deals. These changes may affect those considering these kinds of mortgages, whether they are first time buyers or are looking for remortgage options.
Mortgages Over £500,000 Will Not Qualify For an Interest Only Mortgage
Lloyds has announced that it will no longer allow interest only deals to be applied to borrowing over £500,000. This may particularly affect workers in the banking and financial sectors, many of whom have used this kind of deal to save money on mortgage repayments. Many have taken advantage of the lower monthly payments that come with an interest only loan and then used their annual bonuses to pay off the capital sum they borrow.
Acceptable Repayment Vehicles Have Also Been Changed
Borrowers with interest only mortgages use their monthly repayments to pay off the interest that accrues on their loan. When the mortgage ends, they then have to find the capital sum that was originally borrowed and pay it back. Lenders tend to prefer that homeowners use investment vehicles such as endowments, pensions and ISAs to do this.
It has become common, however, for people to use other ways to repay their original borrowing. Financial sector workers may use their high annual bonuses; others may try to use inheritances, the sale of a business or the sale of the property itself. These repayment solutions will now no longer be accepted by Lloyds and they may ask for proof of an acceptable savings vehicle and proof of regular payments.
Getting Interest Only Mortgage Loans May Get Harder Generally
Although interest only mortgages may be growing in popularity with consumers, many other lenders are making moves to make it harder to take them out. Branded as high-risk by the Financial Services Authority, lenders seem to be imposing stricter conditions on this type of lending to protect their interests.
Some, for example, will only give out interest only deals on mortgages with an LTV of 75% or less. Others may allow more flexibility than Lloyds in terms of repayment vehicles (i.e. they may allow the property sale as a way of paying off capital at the end of the loan) but they may impose stricter conditions on how these deals work.
Interest Only Mortgages and First Time Buyers
Many first time buyers find it harder to afford to buy a property at the moment and some may consider an interest only deal as a way of keeping monthly costs low. The lower repayments given here may make it easier to qualify on income/affordability terms than with a comparable repayment loan. Making provision for capital repayment will add to costs, however, and putting this element off till a later date may not be a good idea.
Future suggested changes by the Financial Services Authority may also make this less easy as the body would like to see lending restricted to those that can prove that they could also afford a repayment mortgage for the sum that they would borrow in an interest only deal.