Top tips for interest only borrowers

This week has seen more research from the Council of Mortgage Lenders (CML) into the FSA’s proposed plans to encourage more responsible mortgage lending.  The trade body said that if the FSA’s proposals had been in effect from 2005, “around 3.8million “good” loans would potentially not have been granted”.  In total, around half of all 8 million loans taken out between 2005 and 2009 would not have been approved if the tighter lending criteria had been in force.

This comes a few days after the CML warned that the FSA’s plans could effectively kill off interest only mortgages.  The regulator’s suggested criteria include:

  • Assessing how much you can borrow on a repayment basis, even if the mortgage is to be on interest-only.
  • Assessing how much you can borrow based on a maximum mortgage term of 25 years, even if the actual term is to be longer.
  • Stricter rules on what lenders will accept as a valid repayment vehicle for interest only mortgages.
If you currently have an interest only mortgage and are concerned about how these changes would affect your chances of remortgaging or moving home, then here are a few tips to help your chances of meeting lenders’ criteria:

Switch to repayment If you feel confident that you can afford your mortgage on a repayment basis, then switching to repayment is a sensible move.  This is the safest way to know that your mortgage will definitely be paid off at the end of its term, provided you make all the payments.  If switching in one go is a bit too much to swallow, you could switch just part of your loan on to repayment – be aware though that some lenders will charge an admin fee for changes like this.

Make overpayments If your mortgage is on interest only and you have spare income each month, then consider making overpayments in to your mortgage.  There are a number of benefits to this – firstly, overpaying can help you pay the mortgage off quicker, which can save you thousands of pounds in interest.

It can also increase the equity you have in your property – the difference between how much your home is worth and how much you owe on your mortgage.  This has a double benefit – it will give you a wider choice of mortgage deals when the time comes to remortgage or move home and it may allow you to get a cheaper rate on your next mortgage.

See how much you could save by overpaying with our calculator.

Review your plan for repaying the loan Make sure you have a definite plan for building up enough money to repay the mortgage at the end of the term.  If you already have a repayment vehicle such as an ISA in place, make sure you review it regularly to check it’s still on track to pay off your mortgage.

Lenders are already getting stricter on what they’ll accept as a valid repayment vehicle – Halifax for example recently said that it will no longer lend on interest only if the only stated means to repay the mortgage is by selling the property at the end of the mortgage term.  And both Halifax and Barclays no longer accept a future inheritance as a means of repaying the loan.

If you haven’t yet set up a suitable repayment vehicle, do so now and be prepared for lenders to ask for proof of it when you apply for a new mortgage.

Buy to Let If you have an interest only mortgage on a buy to let property, don’t worry – as the property is an investment rather than your own home, having an interest only mortgage and intending to pay the loan back by selling the property in the future is still acceptable to most lenders.

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