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The not-so-slow, yet painful decline of the interest-only mortgage

by: Melanie Bien
  • 05/10/2012
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The not-so-slow, yet painful decline of the interest-only mortgage
Our biggest mutual announced yesterday that it would no longer be offering interest-only mortgages to new customers.

Nationwide also won’t allow existing borrowers with interest-only mortgages to take on more funding on those terms.

It’s a shocking development when such a big lender makes such a big move. We’ve seen other lenders pull out of this market, with the Co-operative refusing to offer interest-only mortgages since May and RBS and Coventry building society no longer offering interest only to first-time buyers.

Other lenders have reduced maximum loan-to-values and loan sizes on interest-only loans, and reduced the number of acceptable repayment vehicles for paying back the capital.

I must declare an interest – I have part of my mortgage on an interest-only basis. It would have been more but the lender wouldn’t allow that and insisted that the vast majority of it went on a repayment basis.

That was annoying at the time, but now? I’m relieved, because when it’s time to remortgage there will no doubt be even fewer lenders prepared to offer interest-only terms.

And yet, interest only does suit some people, most notably those who have a sensible repayment strategy in place, who usually rely on bonuses for a large part of their income.

I’m referring to wealthier borrowers, many of whom already get their mortgages from the private banks and who will have no option but to increasingly turn to those lenders, if they meet their criteria.

And everyone else? It’s repayment or nothing, one size fits all. And yet, when it comes to mortgages, it really doesn’t. For some people, not necessarily all, interest only was the right choice and now they don’t have one.

Melanie Bien is director at Bien Media

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