As house prices rise Lenders have reintroduced interest only mortgages accessed only by wealthy homeowners with large amounts of equity.
With rising property prices first time buyers or home movers buying larger homes can keep their payments down with an interest only mortgage but need equity of 50% or more.
Homeowners with an interest only mortgage only pay the interest on the loan and not the capital to repay the loan when the term ends.
Interest only mortgages have raised concern recently as the charity Citizen Advice say about 934,000 homeowners have no repayment plans for these loan and at the end of the term and risk their homes repossessed by the lender.
This has been seen as irresponsible lending following the boom in demand before the financial crisis and most lenders ended sales several years ago.
Lenders cautious about interest only
Lenders have been cautious with their lending terms following new rules introduced by the Mortgage Market Review (MMR).
There are tighter restrictions on affordability as lenders must take into account a homeowner’s ability to repay the mortgage. The rules apply to first time buyers, home movers and remortgage buyers when securing or increasing a loan.
A report by the Council of Mortgage Lenders (CML) shows at the end of 2014 there were 1.9 million pure interest-only mortgages outstanding.
These numbers have reduced by 16% or 300,000 fewer loans in the last year as mortgages come to the end of their term and are repaid or remortgaged onto full repayment terms without falling foul of new affordability rules.
For remortgage buyers with interest only mortgages, if you switch to a preferential rate you may have to agree to a repayment mortgage instead where you begin to pay back the loan.
According to the CML lenders are considering options for homeowners that cannot repay their interest only mortgages. This could include involving equity release to allow older people to stay in their own homes with a lifetime mortgage.
For older homeowners at the end of their terms, they should talk to their lenders as Financial Conduct Authority (FCA) expects lenders to deal fairly with people so it is very likely they could be given a five year extension to their mortgage.
The equity release buyer can be forced to repay their loan at a certain age and rather than downsizing, agree a lifetime mortgage without any evidence of earnings which is important for borrowers with only pension income.
Deals offered by lenders
For interest only mortgages lenders require homeowners to have a large deposit or equity amount of 50% of the property value.
Other lenders restrict borrowing to no more than 50% loan to value (LTV) of the property value or require a minimum level of earnings and a repayment plan for the loan.
Buy-to-let investors usually have interest only mortgages and lower interest rates mean they can remortgage to reduce the cost interest repayments to lenders.
Abbey Life offer a two year 1.59% fixed rate mortgage deal and Leeds building Society a two year 1.99% fixed deal but require homeowners to have a £150,000 deposit with loans of no more than 50% of the property value.
The Woolwich offer a two year 1.39% tracker deal, would require you to earn £75,000 and Virgin Money a two year 1.44% tracker deal but you must earn £100,000 before you could be considered for an interest only mortgage.
Other lenders such as TSB with a two year 1.24% tracker deal and Halifax with a two year 1.64% fixed deal would need you to have other assets such as equity in another property, investments, shares or cash to the value of the mortgage as the repayment vehicle.
What are your next steps?
Speak to our LCM mortgage advisers if you are planning to move home, buying your first home, remortgaging your existing home to a new cost effective mortgage deal or are a buy-to-let investor.
For equity release buyers our London City Mortgage brokers can recommend lifetime mortgages allowing you to receive cash from your property to help maintain your standard of living as costs rise.
Learn more by using the mortgage cost calculators, equity release calculator and property value tracker chart. Start with a free mortgage quote or call us and we can take your details.
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