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Interest-only mortgages fall further from grace as interest rates held

04.10.2012

There were no real surprises today when the Bank of England announced that interest rates would be held at 0.5 per cent for another month and that there would be no further quantitative easing (QE) – for now. It still looks likely that there will be more QE before the year is out, and even a cut in rates – if you believe some forecasters.

What is surprising is Nationwide’s announcement that it will no longer be lending to new borrowers on an interest-only basis. Existing borrowers on interest only who require further funds won’t be able to get them on an interest-only basis either. However, existing customers on interest only will be able to keep this arrangement going.

This decision is surprising in its severity. Yes, interest only is hardly popular among lenders now, with the majority severely pulling back from it, offering restricted loan-to-values and maximum loan sizes, while reducing the number of repayment vehicles that are deemed acceptable. But not offering it at all to any new customers, not just first-time buyers? That’s an extreme move. Interest only doesn’t suit everyone but as long as the borrower has a genuine repayment strategy in place, why is it an issue for lenders?

It might not be long before the only place you’ll find an interest-only mortgage is a private bank.

Advice is increasingly crucial, whether you have an interest-only mortgage or are on your lender’s standard variable rate (SVR). While interest rates may not have moved this month, Santander is hiking its SVR from 4.24 to 4.74 per cent regardless. This means higher monthly payments for thousands of mortgage borrowers. There might be an opportunity to remortgage if you have enough equity in your home, your earnings haven’t fallen over the past couple of years and you are not on interest only. If not, you may struggle.

Adrian Anderson
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Adrian Anderson
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