08 April 2011

Lenders are restricting the Interest Only option.

There has been much hype recently regarding Interest Only versus Capital and Interest (Repayment) mortgages. With an Interest Only mortgage, you only pay interest, so, at the end of your chosen term, you still owe the lender the same amount as when you began. Normally with this method, it is recommended that you contribute to a saving or investment vehicle to generate funds to repay the mortgage. This is generally optional but the Financial Services Authority (FSA) are paying great attention to this as they do not want to see customers with large debts remaining later in life.

With a Repayment mortgage, you pay both capital and interest each month. Initially, this is more expensive, but it does mean that you pay back the full loan by the end of the term, assuming you meet the lenders required payments on time.

We are seeing more and more lenders tighten their requirements on Interest Only mortgages. Nationwide and Lloyds Banking Group (including Halifax) have recently limited the maximum loan available on an Interest Only option to 75% of the property value. Above this level, Repayment is mandatory.

Some lenders charge higher interest rates if you take an Interest Only mortgage and many are trying to persuade customers to switch from this method to Repayment. Some no longer offer Interest Only at all!

Why the recent attention to these repayment options? Simply, because many borrowers who have stepped onto the property ladder chose the cheaper option promising to review their payment plans at a later date. The problem is, the ‘later date’ never seems to arrive! As we all know, people generally live to their means. Many borrowers on this scheme have no savings or viable plans to pay back the debt and this is worrying!

However, Interest Only mortgages remain practical for certain professions - people entitled to annual bonuses - the fluctuating income of self employed - employments where lump sums are received after a number of years in service are some examples.

Some lenders offer a part and part option, enabling the customer to pay some of their loan on Repayment and some on Interest Only. This serves to help many borrowers and keeps monthly payments at a lower level yet the underlying issue still remains. At the end of the mortgage term, the Interest Only element still needs to be repaid! Seek professional advice.

No comments:

Post a comment