Banks loosen interest-only mortgage terms but borrowers in the dark

Banks loosen interest-only mortgage terms but borrowers in the dark

 

Mortgage brokers Trinity Financial and Private Finance say a common misconception among borrowers is that interest-only is a pre-credit crisis mortgage option.

However, since Coventry Building Society re-entered the interest-only market in September and Nationwide widened its range to purchases in November a flurry of lenders have made criteria tweaks to open up their interest-only options to more borrowers.

NatWest changed its interest-only income criteria in November to match its capital repayment policy which means bonuses can be taken into account. But single applicants must earn at least £75,000 a year and joint applicants must earn £100,000 between them.

In January, Barclays enhanced its part repayment and part interest-only criteria by increasing its loan to value (LTV) from 80 to 85 per cent for those classed as Barclays Wealth Management or Premier Banking borrowers.

In the same month, Metro Bank said a homeowner choosing interest-only could now state debt consolidation as their reason for borrowing. The bank also increased its part and part LTV to 75 per cent when the sale of the property is the repayment strategy and the property is worth at least £600,000.

Meanwhile, Dudley Building Society launched a part and part discounted interest rate of 3.94 per cent up to 85 per cent LTV. The interest only portion of the loan can be up to 75 per cent of the debt and capital repayment accounts for the remaining 10 per cent.

According to analysis from Sesame Bankhall Group (SBG), there are now 61 lenders on its panel that offer residential interest-only deals.

Data from Moneyfacts shows that there are 89 pure interest-only mortgages available. However, more than 60 per cent of the 2,893 mortgage deals available on 1 January offered borrowers the option of having part of their mortgage on interest only and part on capital repayment.

Aaron Strutt, product and communications director, Trinity Financial, said: “Interest-only mortgages are popular with our clients and they are much more widely available than they were a couple of years ago. Yet a lot of borrowers still do not realise that lenders are offering these mortgages again.

“Interest-only isn’t suitable for everyone but they useful at the moment. The vast majority of borrowers take full capital repayment mortgages, while part interest and part capital repayment deals are more suitable for many homeowners who want to lower their monthly repayments.”

Lenders do not charge a premium for their interest-only deals so borrowers have the opportunity to lock in to sub 2 per cent rates.

Santander, for example, is offering a rate of 1.24 per cent with a fee of £999 up to 60 per cent loan to value, available to interest-only borrowers.

This means a homeowner with a £300,000 mortgage would pay £311 a month.

Chris Sykes, associate director, Private Finance, said: “We do a fair amount of residential interest-only mortgages. It does seem like they are the lesser-known mortgage product, assumed extinct, as some clients will even feedback other brokers have said that residential interest-only mortgages no longer exist post 2007.

“Granted they took a little while to come back but they have been gradually returning over the years and now offer a competitive alternative to normal capital and interest mortgages in the right situation.”

Strutt added: “Most of the bigger lenders want a larger slice of the interest-only market and many of them are looking at ways to ease their acceptance policy, especially if their main competitors offer a more lenient policy.

“Brokers have waited a long time for the lenders to really push to attract interest-only business, but the market is more positive.”

 

Market changes

According to criteria analysis of interest-only mortgages by SBG, borrowers who want to use sale of property as their repayment vehicle are generally restricted to a maximum LTV of 50 per cent. Most lenders are happy to offer part repayment and part interest-only up to 75 per cent LTV.

Leeds Building Society will offer up to 60 per cent LTV and Virgin Money up to 65 per cent LTV on interest only. Building Societies such as the Harpenden and Leek United will go up to 75 per cent LTV.

Banks generally stipulate the borrower must have between £150,000 to £300,000 equity in the home.

Sesame’s analysis found Santander to be the most flexible on this criteria point, accepting £150,000 equity and allow this to be at end of term if there some element of capital and repayment on the mortgage. Otherwise lenders request the minimum equity to be available on application.

Dudley Building Society, Family Building Society, and Furness Building Society have no strict restrictions on level of equity in the property and instead look for comparison properties within a five-mile radius that the homeowner would be able to downsize to.

The minimum income levels of £75,000 for a single borrower and £100,000 for joint stipulated by NatWest are the norm.

Jane Benjamin, director of mortgages, SBG, said: “A factor to remember for interest only is that lenders are stricter on income requirements compared to capital and repayment. This is important when placing a case with the mainstream lenders. Accord, Coventry, Leeds Building Society and Santander have no minimum income requirements, however, other mainstream lenders only accept applications for high income earners.”

With banks willing to offer more flexible terms on interest only than they have done in recent years, it can offer borrowers a way to free up cash but with such tight criteria controls in place, an interest-only arrangement is not for the cash strapped.

Sykes added: “The mortgage needs to be affordable in a lender’s eyes. Often lenders will stress the mortgage is affordable on a capital and interest loan rather than interest-only just to be sure the borrower can afford it. So suggestions that interest only is a useful tool in times of distress will often fail.

“If you are in a vulnerable position with no work or are self-employed with reduced income it may well be the mortgage isn’t available to you at all, or on an interest-only basis at the moment.”