The End of the Interest Only Mortgage?

As banks and building societies attempt to repair their balance sheets and prevent future crises, the end of the interest-only mortgage could be in sight.

An estimated one million British home owners are on interest-only deals, saving them thousands of pounds in payments each year but storing up a potential mortgage ‘time bomb’, since they may have no means of repaying their loans once the term is up.

Coventry Building Society recently switched off its interest-only mortgage for first-time buyers. And the noises coming from the Financial Services Authority over excessive lending support the trend away from interest-only deals.

Originally these mortgages were designed to run alongside another means of repaying the loan principle, such as an endowment policy or an ISA. But in the mid 2000s this requirement was gradually dropped, as property prices continued to defy gravity and the increasing amount of equity that owners had in their properties appeared to justify the non-repayment conditions.

With property values broadly falling in the UK, this attitude has reversed, with lenders looking to secure their advances through repayment vehicles, which reduce the chances of default. “Repayment mortgages offer more security than interest-only deals, but forcing everyone on to one, regardless of their circumstances, is not realistic,” says Malanie Bien, director of Private Finance.

Banks are not allowed to oblige their customers to move onto a repayment mortgage, although it’s likely to be more difficult to get an interest-only deal in future. Lenders are likely to want to see a repayment vehicle (as in the past) alongside an interest-only mortgage, and even then, only when borrowers have a substantial amount of equity in their properties – e.g. more than 30 per cent.

Many home-owners now face the prospect of their mortgage charges going up by 60 to 80 per cent, as they shift to repayment deals. Someone with a £150,000 mortgage paying 3.5 per cent would pay £751 a month instead of £438.

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