With Santander and Lloyds Banking Group tightening their terms on interest-only borrowing in the past week, those who require such a loan may be worried about their prospects of finding one.
Over the past year, many lenders have reduced the maximum loan-to-value (LTV) on interest only to 75 per cent, and required that borrowers provide proof of how they intend to repay the loan from a limited number of acceptable methods. This crackdown followed an early draft of the Financial Services Authority’s Mortgage Market Review, which revealed plans to make lenders monitor the ability of borrowers to find a suitable plan to repay the capital. This will push up costs and is now deterring lenders from offering interest-only mortgages in the first place.
But private banks behave differently. All of the private banks are comfortable with interest only, particularly as their usual terms are five years with a reviewable facility, rather than a 25-year repayment commitment. This means they can review the loan after this time and satisfy themselves that the client will be able to repay the capital.
While high-street banks need to see evidence of a repayment vehicle, private banks are more likely to take a view, especially as they will have more details about the client’s assets and liabilities. High-street lenders, on the other hand, do not usually look at assets and liabilities as they mainly focus on income to service the debt and still presume that the client will take out an ISA or similar to repay the capital.
Interest only suits many of our clients as their income streams mean they rely on dividends and bonuses, which can be used to pay lump sums off their mortgage. If you are in this position and are not sure what to do, speak to Anderson Harris, as we understand the private banks and their criteria.