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| Interest-only mortgage crackdown may have gone too far, regulator warns | Interest-only mortgage crackdown may have gone too far, regulator warns |
| (12 days later) | |
| So many major lenders have pulled out of interest-only mortgages that the regulator is worried consumers could suffer. The exodus from these loans, which allow home buyers to only repay the interest each month, has been sparked by a crackdown on affordability checks, due to come into force next year. | So many major lenders have pulled out of interest-only mortgages that the regulator is worried consumers could suffer. The exodus from these loans, which allow home buyers to only repay the interest each month, has been sparked by a crackdown on affordability checks, due to come into force next year. |
| However, the new Financial Conduct Authority (FCA) is concerned that too many lenders have abandoned them, or made them impossible for ordinary people to get. | However, the new Financial Conduct Authority (FCA) is concerned that too many lenders have abandoned them, or made them impossible for ordinary people to get. |
| In his first comment last week, the head of the FCA, Martin Wheatley, said: "There are two sides to the risk equation – consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products." | In his first comment last week, the head of the FCA, Martin Wheatley, said: "There are two sides to the risk equation – consumer detriment arising from the wrong products ending up in the wrong hands, and the detriment to society of people not being able to get access to the right products." |
| HSBC and Yorkshire building society are the latest in a raft of lenders to restrict interest-only mortgages. They pulled out of the market for new borrowers last month, though HSBC will accept interest-only borrowers with an income of over £100,000 or £50,000 in savings with the bank. | HSBC and Yorkshire building society are the latest in a raft of lenders to restrict interest-only mortgages. They pulled out of the market for new borrowers last month, though HSBC will accept interest-only borrowers with an income of over £100,000 or £50,000 in savings with the bank. |
| They join Nationwide, NatWest, RBS, Coventry building society and Newcastle building society which stopped accepting new applications for these loans last year. | They join Nationwide, NatWest, RBS, Coventry building society and Newcastle building society which stopped accepting new applications for these loans last year. |
| Lenders have acted ahead of new rules which come into force in April 2014 to ensure that plans to repay the loan are credible, following concerns that during the property boom some buyers took on interest-only loans without making provisions to cover their borrowing. | Lenders have acted ahead of new rules which come into force in April 2014 to ensure that plans to repay the loan are credible, following concerns that during the property boom some buyers took on interest-only loans without making provisions to cover their borrowing. |
| At the height of their popularity in the 1980s, they accounted for more than 80% of all mortgage loans. | At the height of their popularity in the 1980s, they accounted for more than 80% of all mortgage loans. |
| Now the Council of Mortgage Lenders (CML) reckons they make up fewer than one in 10 of new mortgages, with only 1% of first-time buyers going for them. The exception is the buy-to-let market, where interest-only is still widespread. | Now the Council of Mortgage Lenders (CML) reckons they make up fewer than one in 10 of new mortgages, with only 1% of first-time buyers going for them. The exception is the buy-to-let market, where interest-only is still widespread. |
| Nevertheless, the CML estimates there are around 3.8m interest-only homeowner mortgages outstanding. Most are in the hands of older borrowers – credit ratings agency Moody's recently revealed that three-quarters are aged over 60, warning that some could still be making repayments until they die. | Nevertheless, the CML estimates there are around 3.8m interest-only homeowner mortgages outstanding. Most are in the hands of older borrowers – credit ratings agency Moody's recently revealed that three-quarters are aged over 60, warning that some could still be making repayments until they die. |
| "The trouble is, that if existing interest-only borrowers want to remortgage on a better rate with a different lender they will struggle," says David Hollingworth of mortgage brokers London & Country. "Their options have narrowed alarmingly in the last few months." | "The trouble is, that if existing interest-only borrowers want to remortgage on a better rate with a different lender they will struggle," says David Hollingworth of mortgage brokers London & Country. "Their options have narrowed alarmingly in the last few months." |
| Who still offers interest-only? | Who still offers interest-only? |
| Among the major lenders, Lloyds Group – including Halifax – Santander and Woolwich will still offer these products provided you meet strict criteria and have a sound way to repay the loan. Virgin Money and Principality building society are among the medium-sized lenders which still consider them. Clydesdale bank will allow borrowers to start their mortgage on an interest-only basis, then move them to a repayment mortgage after three years. | Among the major lenders, Lloyds Group – including Halifax – Santander and Woolwich will still offer these products provided you meet strict criteria and have a sound way to repay the loan. Virgin Money and Principality building society are among the medium-sized lenders which still consider them. Clydesdale bank will allow borrowers to start their mortgage on an interest-only basis, then move them to a repayment mortgage after three years. |
| "These lenders won't let you borrow more than 50% to 70% of the value of your home in the main, and want you to have a minimum of £100,000 to £300,000 equity," says Ray Boulger of mortgage brokers John Charcol. | "These lenders won't let you borrow more than 50% to 70% of the value of your home in the main, and want you to have a minimum of £100,000 to £300,000 equity," says Ray Boulger of mortgage brokers John Charcol. |
| Santander, for example, will only let you borrow up to 50% of the property's value on an interest-only basis – the rest will have to be on a repayment basis. Woolwich (the mortgage arm of Barclays) will lend up to 75% but you have to borrow at least £300,000, while Virgin Money will lend up to 70%, with the minimum loan being £300,000. | Santander, for example, will only let you borrow up to 50% of the property's value on an interest-only basis – the rest will have to be on a repayment basis. Woolwich (the mortgage arm of Barclays) will lend up to 75% but you have to borrow at least £300,000, while Virgin Money will lend up to 70%, with the minimum loan being £300,000. |
| What method of repayment is acceptable? | What method of repayment is acceptable? |
| At some stage you'll have to repay the lump sum. This is now the major stumbling block with lenders looking far more closely at your repayment vehicle. In the past, homebuyers didn't even need to say how they intended to repay the capital. | At some stage you'll have to repay the lump sum. This is now the major stumbling block with lenders looking far more closely at your repayment vehicle. In the past, homebuyers didn't even need to say how they intended to repay the capital. |
| Relying on bonuses or commission from your employer is no longer acceptable, nor is saving into a cash Isa. Few lenders will accept a future inheritance, as it's regarded as a hope rather than a definite expectation. | Relying on bonuses or commission from your employer is no longer acceptable, nor is saving into a cash Isa. Few lenders will accept a future inheritance, as it's regarded as a hope rather than a definite expectation. |
| Even making regular payments into an investment Isa won't pass muster in most cases. | Even making regular payments into an investment Isa won't pass muster in most cases. |
| The exception is Virgin Money, which will accept a stocks and shares Isa. It will assume 3% growth a year when it works out if it is enough to cover the loan. The projected value of an endowment will be accepted by most lenders, according to Boulger. | The exception is Virgin Money, which will accept a stocks and shares Isa. It will assume 3% growth a year when it works out if it is enough to cover the loan. The projected value of an endowment will be accepted by most lenders, according to Boulger. |
| Saying you plan to repay from the profits on the sale of the property is much harder than it used to be. | Saying you plan to repay from the profits on the sale of the property is much harder than it used to be. |
| Woolwich and Principality require you to own at least 50% of your home and Woolwich wants your share to be worth at least £300,000, while Principality will accept £150,000. Virgin will go up to 60% loan-to-value (LTV) but you must have at least £150,000 equity. Aldermore will go as high as 75% with no minimum property value. | Woolwich and Principality require you to own at least 50% of your home and Woolwich wants your share to be worth at least £300,000, while Principality will accept £150,000. Virgin will go up to 60% loan-to-value (LTV) but you must have at least £150,000 equity. Aldermore will go as high as 75% with no minimum property value. |
| Planning to use your pension is fine, as you can take 25% of it as a tax-free lump sum when you retire but lenders will require proof that you are saving enough into your scheme. Halifax, for instance, wants borrowers to have saved at least £1m into their pension, according to Hollingworth. | Planning to use your pension is fine, as you can take 25% of it as a tax-free lump sum when you retire but lenders will require proof that you are saving enough into your scheme. Halifax, for instance, wants borrowers to have saved at least £1m into their pension, according to Hollingworth. |
| What should you do? | What should you do? |
| The way things are, you could be stuck with your current lender or have a limited choice of interest-only lenders. "If you want to remortgage with a different lender you'll need to have built up equity of around 40% to 50%," says James Cotton of London & Country. | The way things are, you could be stuck with your current lender or have a limited choice of interest-only lenders. "If you want to remortgage with a different lender you'll need to have built up equity of around 40% to 50%," says James Cotton of London & Country. |
| "If not, your options are limited. The safest is to move to a repayment mortgage if you can afford it, or put at least part of your loan on a repayment basis." | "If not, your options are limited. The safest is to move to a repayment mortgage if you can afford it, or put at least part of your loan on a repayment basis." |
| In addition, some lenders are basing their decisions on you being able to afford your current mortgage on a repayment basis, even for interest-only mortgages. So if you want interest-only because you can only afford the lower monthly payments, you may be out of luck. | In addition, some lenders are basing their decisions on you being able to afford your current mortgage on a repayment basis, even for interest-only mortgages. So if you want interest-only because you can only afford the lower monthly payments, you may be out of luck. |
| Interest rates have plummeted, making it a good time to switch to a repayment mortgage fixed over a longer term to give you certainty that you won't suddenly see your monthly repayments rise. | Interest rates have plummeted, making it a good time to switch to a repayment mortgage fixed over a longer term to give you certainty that you won't suddenly see your monthly repayments rise. |
| Norwich & Peterborough has a five-year fix at 2.74% with a £295 fee, available on loans of up to 60% of a property's value. | Norwich & Peterborough has a five-year fix at 2.74% with a £295 fee, available on loans of up to 60% of a property's value. |
| On a £150,000 repayment mortgage, the monthly payments over 25 years are £691. This compares well to the same size loan on interest-only on a standard variable rate – Santander's SVR of 4.74% means current monthly payments are £593. | On a £150,000 repayment mortgage, the monthly payments over 25 years are £691. This compares well to the same size loan on interest-only on a standard variable rate – Santander's SVR of 4.74% means current monthly payments are £593. |
| Among the cheapest five-year fixes are Abbey (owned by Santander and only available through intermediaries) at 2.99% with a fee of £995 and Virgin at 2.94% with a £1,094 fee. | Among the cheapest five-year fixes are Abbey (owned by Santander and only available through intermediaries) at 2.99% with a fee of £995 and Virgin at 2.94% with a £1,094 fee. |
| Both are available if you own 30% of your home's value. | Both are available if you own 30% of your home's value. |
| Case study: Michael Nelson | Case study: Michael Nelson |
| Self-employed plasterer and tiling contractor Michael Nelson, 52, took out his first interest-only mortgage earlier this year. | Self-employed plasterer and tiling contractor Michael Nelson, 52, took out his first interest-only mortgage earlier this year. |
| With work more difficult to find these days he decided to build a couple of houses on a plot of land he has and needed to release some of the equity built up in his home in Darlington, County Durham, to pay for the building works. | With work more difficult to find these days he decided to build a couple of houses on a plot of land he has and needed to release some of the equity built up in his home in Darlington, County Durham, to pay for the building works. |
| He was annoyed when his bank, HSBC – which he's been with for 25 years – wouldn't let him remortgage to an interest-only loan, despite him having a lot of equity in his home. | He was annoyed when his bank, HSBC – which he's been with for 25 years – wouldn't let him remortgage to an interest-only loan, despite him having a lot of equity in his home. |
| "I was surprised to find interest-only loans were hard to get," says Nelson, who is married to Lesley, 51, and has a 15-year-old son, Alexander. | "I was surprised to find interest-only loans were hard to get," says Nelson, who is married to Lesley, 51, and has a 15-year-old son, Alexander. |
| "I tried a couple of other places before I found a good deal with Virgin Money." | "I tried a couple of other places before I found a good deal with Virgin Money." |
| He has taken a two-year fixed-rate mortgage of £240,000 at 2.64% with a £999 fee. His five-bedroom house, which he converted from an old stable block six years ago, is now worth £450,000. | He has taken a two-year fixed-rate mortgage of £240,000 at 2.64% with a £999 fee. His five-bedroom house, which he converted from an old stable block six years ago, is now worth £450,000. |
| "The idea is that when I sell the houses I build that I'll pay some back and use any profit to do another building project." | "The idea is that when I sell the houses I build that I'll pay some back and use any profit to do another building project." |
| Top mortgages | Top mortgages |
| Chelsea Building Society | Chelsea Building Society |
| Yorkshire BS | |
| Nationwide | Nationwide |
| Provided by London & Country for the Guardian | Provided by London & Country for the Guardian |