Interest-Only Mortgages
Lloyds TSB group have changed how they deal with interest-only mortgages.
Until now they have accepted them below a certain loan-to-value. This will change.
They now propose to not only insist on repayment only above £500k, but also intend to increase the interest rate by 0.20% for those who take interest-only compared to repayment.
Why would they do this? A few reasons.
First, a repayment mortgage allows them to reduce the amount they lend each year in line with the mortgage repayments. So the liability on their balance sheet declines and allows them to lend more money to other people.
Secondly, it reduces the risk they are exposed to. A repayment mortgage has a declining amount owed each year compared to an interest only mortgage. So as time progresses, the equity in the property will automatically increase, regardless of house price movements. Hence the risk to the bank decreases because, should they have to repossess the house, they have a greater chance of selling the property for more than the mortgage. Compare this to interest-only, where the amount owed stays exactly the same.
Finally, it reduces the banks exposure to any legal action in the future from borrowers who may argue that they have been miss-sold a mortgage.
If you have a proper repayment vehicle, such as an ISA, endowment or pension plan, you may continue with an interest-only mortgage – it is only aimed at new borrowers with no repayment vehicle.
The effect of this policy, if copied by other lenders, may well be to force property prices lower. This is because there are people who borrow on an interest-only basis in order to increase their affordability. For instance, borrowing £250k over 25 years at 5% will cost £1,461 a month repayments, as opposed to £1,041 interest-only. So if your budget is £1,040 a month, you will be forced to reduce your maximum loan to around £180,000. This is a big difference and it’s not hard to imagine that, if duplicated across the whole market, the effect would be to force people to pay less for houses and hence bring prices down.
This entry was posted on Thursday, May 13th, 2010 at 12:49 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.