UK lender withdraws interest only mortgage range
09-05-2012
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The lenders said that the change will not affect existing interest only mortgage customers. It pointed out that a combination of factors including falling house prices and uncertainty about the direction of interest rates have led to a rapid decline in demand for these loans.
Currently less than 10% of new mortgage customers at the Co-operative Bank are taking out mortgages on an interest only basis. This figure has fallen rapidly over the last five years from almost 25% in 2007.
It said in a statement that it fully supports the changes relating to interest only lending which are currently being proposed for 2013 under the Financial Service Authority's Mortgage Market Review. ‘We expect that these changes will see a move to all customers who apply for a mortgage being assessed on the basis that they can afford a capital and repayment loan. In line with these suggestions we are choosing to lend to new customers on a capital and repayment basis only moving forwards,’ it said.
‘As a responsible lender, The Co-operative Bank remains committed to our existing interest only mortgage customers who will still be able to switch to any open product for the same amount of borrowing on an interest only basis when they come to the end of their deal. In addition they will also be able to take their interest only mortgage with them should they move home,’ the statement continued.
A number of lenders have tightened their criteria for interest only loans over recent months, according to Clare Francis, mortgage expert at MoneySupermarket.com.
‘The Co-operative has gone one step further and will no longer offer them to new borrowers. This change is largely in response to the FSA's Mortgage Market Review and it wouldn't be surprising to see more lenders follow suit,’ she said.
‘There is nothing wrong with an interest only mortgage per se, as long as the borrower knows how they will repay the capital once the mortgage term ends. However, there are fears that some of those with interest only mortgages do not have an adequate repayment plan in place which could cause major problems when their mortgage term ends. Making this type of loan harder to come by helps reduce the risk of the so-called mortgage time bomb exploding,’ she explained.
The clampdown on interest only mortgages isn't likely to have a major impact on the housing market in the near term, though, as the vast majority of people opt for repayment mortgages. A repayment mortgage gives a guarantee that your debt will be paid off by the end of the term, so it's the simplest and often most appropriate option.
‘Those most affected from the restriction in the availability of interest only loans will be borrowers who already have them. They may find they are unable to remortgage onto another interest only deal. As a result, they will either have to stick with their current mortgage or switch to a repayment loan which will mean an increase in their monthly mortgage payments. Anyone worried about this should speak to an independent mortgage broker for advice,’ added Francis.
James Hillon, head of mortgages at the Co-operative Bank said that the mortgage market has changed greatly in the last four years. ‘As a responsible lender we closely monitor these developments. With house prices continuing to stagnate, we're seeing that buyers are increasingly taking a long term view to home ownership rather than seeing it as a route to watch their money grow quickly as was the case for many in the property boom years from the late 1990s onwards,’ he explained.
‘We understand that all our customers have individual requirements and as a responsible lender we remain committed to working with them to find an affordable solution to owning their own home. For example we know that many customers historically turned to interest only mortgages as a way of meeting monthly outgoings when on a variable monthly income. For these customers we continue to offer a range of mortgages which enable them to make overpayments as and when they can afford to, then use their overpayments fund to meet repayments in the months where they earn less,’ he added.
The above changes will also apply for mortgages offered through Britannia and residential mortgages offered through Platform, the dedicated intermediary lender for the Co-operative Bank.
