Lloyds announces more interest-only changes effective tomorrow

Brokers received a note about the move earlier today.

Lloyds said this was part of its on-going review of interest-only which began in May 2010 but confirmed "recent changes in the market" prompted this swift action.

A Lloyds spokesman, said: "The updated criteria, which will apply from Thursday 16 February, will ensure that all interest only borrowers are in a position to repay their loan in full at the end of the term, in line with our responsible approach to this type of lending."

The bank will no longer accept cash savings as a repayment vehicle, but will still take longer-term repayment vehicles.

The risk-control changes include more cautious investment performance calculations on vehicles such as Stocks and Shares ISAs, endowments and unit trusts, for example.

From tomorrow, Lloyds is only willing to lend up to 80% of the value of the repayment vehicle, so if the Stocks and Shares ISA is worth £100,000, the bank will only lend £80,000, explained a spokesperson.

The value of any investment vehicles must hold a minimum value of £50,000 and up to 80% of the current fund can be used. For use as a repayment vehicle, pension savings must have a current fund value of over £1m where only 25% can be used toward the value of the property. 

The sale of another residential property can be used as a repayment vehicle, but it must have a minimum of £50,000 of equity and only 80% of the sale price can be put toward mortgage repayment.

Dominic Lipnicki, director of Your mortgage decisions, said: "I think it's a bit rich of Lloyds to say that they're no longer going to look at ISAs and cash savings as a repayment vehicle when they sell those products themselves and advertise growth.

"When it comes to cash savings and investments, interest-only mortgages should be accepted as long as the client is aware of how they are going to repay their mortgage and its achievable and not just a hope. I think Lloyds have overreacted on their latest policy changes. This was the fear after Santander's criteria changes last week.

"This will have a major impact on the market. For brokers that rely more heavily on interest-only sales it could have a massive impact on their business, because clearly Lloyds and Santander are not going to be the only lenders to change their interest-only policies."

Terry McCutcheon, chief executive of The Finance Planning Group added: “There are many first-time buyers who are struggling to get onto the property ladder and sometimes interest-only is the right thing. This is something we need to work with lenders on to make sure they're not overstretching their criteria.

“We do whatever is in the customer’s interest but obviously interest-only isn’t a good thing longer-term. We want to make sure we haven’t got people entering retirement with a mortgage."