Interest only mortgage update
Over the past 12 months, more and more lenders have pulled out of the interest only mortgage market. The remaining lenders that are still offering these types of mortgage have very strict criteria on what they would accept as a future repayment vehicle.
Acceptable forms of repayment vehicle are managed savings and investments that have had contributions over the previous 12 months, the projected tax free cash element of a private pension (normally 25% of the fund value), existing endowments and any mortgage free investment properties. Lenders will no longer accept the future sale of the mortgaged property (lenders use a different criteria for buy to let mortgages) unless the loan to value is no more than 50% and there is at least £150,000 of equity in the property.
The maximum age that most lenders will now allow you to take the mortgage to is 70. Therefore, the longer borrowers continue to keep their mortgages on an interest only basis, the less time they will have to repay the capital. This will then mean an even higher increase to their payments as and when they ultimately have to convert to repayment.
As interest rates are now at an all time low, more borrowers are deciding to convert to capital repayment sooner rather than later. By doing this they get access to all of the low rates on offer and not just the select few offered by their existing lender for allowing them to remain on interest only. We have had a couple of cases recently where the monthly payments on a capital repayment basis with a new lender where only marginally higher than the interest only payment to their existing lender as the rates offered by the new lender were over 2.5% lower.
With house price’s falling and borrowers not being able to sell their property, they are left with the concern of either having to try to extend their mortgage or sell and have a reduced amount of equity. If they try to extend the term, they would then have to put this large debt onto repayment and with not many years left to repay it, would be faced with large monthly repayments. No one wants to have to face this dilemma at a time when they are looking to retire. With this in mind we are currently looking to review any Client’s interest only mortgage to see what the impact on their monthly payments would be to convert to capital repayment. Even if you are currently tied into a product, it is still worth reviewing to see what will happen once that deal comes to an end.
Please contact David if you want to review any aspect of your mortgage.