Hopes of obtaining a cheap mortgage receded this week with the news that one of Britain's major lenders is axing interest-only mortgages. Nationwide is to abolish lending on an interest-only basis and experts believe this could start a ‘ripple effect' that spreads through the industry.
If you have an interest only mortgage this news could affect you if you plan to move home or remortgage in the future.
Interest-only mortgages require you to pay the interest on your home loan each month but the outstanding balance of your mortgage will not reduce. This type of home loan was popular during the late 1990s and early 2000s, when house prices were at an all-time high. Council of Mortgage Lenders figures showed that a third of all mortgages were arranged on this basis in 2007.
Many lenders have recently reduced the maximum loan-to-value on interest-only mortgages. Santander, Leeds Building Society and the Coventry Building Society will now only lend a maximum of 50% on an interest-only basis. However, the Nationwide is the first major lender to abolish them altogether.
The Daily Mail reports that the policy change means existing Nationwide customers will not be able to increase their mortgage on an interest-only basis or remortgage to a different deal, but can move home, as long as they borrow no more money. A spokesman for Nationwide said: "Interest-only mortgages are only a tiny amount of new mortgages for Nationwide. We consider them to be a niche product and Nationwide is a mainstream lender."
Keith Osborne from whathouse.co.uk says: "Over recent months many lenders have been making sensible changes to their interest-only lending criteria. Banning them completely seems like an overreaction and fails to take into account many scenarios where an interest-only loan could be ideal."
Many borrowers took out interest-only loans with the intention of repaying the capital through bonuses, an inheritance or the sale of a second property. Now, these borrowers will be forced to pay a significantly higher mortgage payment when they move home or if they decide to remortgage. The Mail reports that "a borrower with a £150,000 mortgage at 4% would need to find an extra £420 a month to move from an interest-only mortgage to a repayment deal".
Mr Osborne adds: "Millions of borrowers will get a rude awakening when they come to move house or remortgage. If other lenders follow suit then homeowners will be forced into taking a repayment loan which will significantly increase their monthly repayments."