Interest only mortgages on the endangered list

Interest only is an area that has felt the full brunt of the tightening in lending criteria in recent years.  The Mortgage Market Review (MMR) made interest only one of its key areas of focus.

Although the MMR does not preclude lenders from lending on an interest only basis, many have already tightened up significantly.  This has primarily resulted in limiting the amount of interest only lending as a proportion of the property value, in some cases to as little as half.  Lenders have also made their requirements for an acceptable repayment vehicle more stringent.

Last week saw Santander adopt a slightly more flexible approach to their interest only lending policy giving some hope that lenders might review their criteria now that the MMR rules are finalised.  It still limits interest only mortgages to 50% of the property value but will now allow borrowing above that to be topped up on a repayment basis.  It is not the only lender to take this sensible view but it was the first time that interest only criteria had seen anything other than tougher rules imposed by a lender.

This move was never likely to herald a market wide turnaround especially as some lenders like Nationwide and Co-operative Bank withdrew entirely from interest only lending earlier this year.

Any hope of further loosening from other lenders was short lived as this week saw two more lenders announce their withdrawal from interest only altogether.  From Monday, Royal Bank of Scotland and Coventry BS will stop offering interest only as an option on new business.

This underlines the fact that interest only mortgages will now be a tiny slice of the market, which is likely to see many existing interest only borrowers with limited options in future.  This may require them to reconsider their repayment strategy to broaden their mortgage options in what looks set to be an increasingly limited interest only market.

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