Newcastle Building Society has become the latest lender to pull out of interest only mortgage lending. It announced today that from immediate effect, any new borrowing must be on a repayment (also known as capital and interest) basis, although existing interest only borrowers can continue as normal with their mortgages.
The move followed similar decisions last month by Royal Bank of Scotland and Coventry Building Society and by other lenders such as Nationwide and Co-operative Bank earlier in the year.
In general, interest only has been an area that lenders have really tightened up on this year – partly in anticipation of new, strict rules (or possibly even a ban) on interest only lending as part of the FSA’s Mortgage Market Review (MMR).
The FSA (Financial Services Authority) published its review in October and although it stopped short of outlawing interest only lending, or prescribing strict rules on lenders, the market had already changed – to the point where getting a new interest only mortgage was very difficult for many borrowers.
It was speculated that some lenders may reverse some of their new interest only rules, or at least relax them once the FSA published its final rules in the MMR – and in fact we saw Santander last month adopt a slightly more flexible approach that suggested others might follow suit.
Santander 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.
Any hope of other lenders doing the same was short lived as two weeks ago, both Royal Bank of Scotland and Coventry Building Society announced they were stopping all new interest only lending completely. And now today we’ve had the same decision from Newcastle Building Society.
Of the remaining lenders that will offer interest only mortgages, most will require some pretty strict criteria to be met – such as needing at least 50% equity in the property. Woolwich has recently introduced a minimum borrowing amount £300,000 for interest only.
Overall, we expect the availability of interest only mortgages to worsen rather than improve – certainly for the typical borrower who doesn’t have a £300,000 mortgage or bags of equity in their home. This means that a repayment mortgage is likely to be the only option for a lot of borrowers – both for home buyers and people switching their current mortgage to a new lender. While this is not actually a bad thing – a repayment mortgage ensures that your debt is repaid at the end of the term, provided you make the payments – it does mean that people used to paying just the interest will need to review their finances and ensure they can afford their new mortgage.
What a repayment mortgage does mean though is that you don’t have to think about setting up and maintaining a separate repayment vehicle to pay off the debt. If you currently have an interest only mortgage and are thinking about switching it to repayment, contact one of L&C advisers to discuss your options.