Interest only re-mortgages being ended by mortgage lenders

More than one million home owners on interest only deals face a sharp rise in interest rates when their current deal expires.
Banks and building societies are increasingly nervous about offering interest only mortgages deals to borrowers, ahead of new lending rules, designed to curb excessive lending.

Coventry Building Society has become the latest mortgage lender to stop offering interest-only deals to first-time buyers. And there are fears that other lenders may be reluctant to offer these deals to people remortgaging, particularly if they have little equity in homes.

With house data suggesting a dip a prices again, this equity is likely to be squeezed further in coming months.

It is estimated that more than one million people took out these loans between 2005 and 2009, as house prices boomed.

Interest only mortgages were traditionally sold alongside a repayment vehicle, usually an endowment policy or, as these fell out of favour, an Isa. The assumption was that the growth on these investments would be sufficient to repay the money borrowed at the end of the mortgage term.

But the Financial Services Authority, and the Ombudsman are increasingly worried that many of these home owners have no means of repaying this capital – and could potentially lose their home at the end of the mortgage term.

When house prices were racing ahead many people used the mortgages to gain a rung on the housing ladder. If you could afford to repay £1,000 a month on an interest-only basis you could – when banks had far more generous lending criteria – get a loan of £350,000; on a repayment basis, this same payment would mean a loan of just £200,000.

Now regulators are putting pressure on banks and building societies to defuse the “mortgage time bomb”. Lenders will be trying to switch people back onto a repayment deal, where the capital is gradually repaid over the term, but this will mean a sharp increase in monthly payments.

Banks and building societies will also be obliged to tighten lending criteria and required to use a repayment mortgage as the basis for calculating affordability. This doesn’t mean interest-only mortgages will be banned, but it will stop people using them solely as a way to increase their borrowing ability.