Do you want an interest only mortgage?
A theme is emerging in the UK mortgage markets of lenders making the criteria by which lenders can switch to interest only payments tighter, potentially making repayments more difficult for those in financial trouble.
Interest only payments are self explanatory, the borrower pays the interest on the amount loaned but doesn’t pay down the actual amount. The switch to this type of payment scheme was traditionally very popular in recessions as it allowed householders to greatly reduce their monthly payments.
The downside to the scheme is that you are extending the overall mortgage period, increasing the amount of time it will take to pay back the whole thing and officially own your own home.
However, many mortgage lenders discontinued most interest-only mortgages during the recent financial crisis, despite the option being the most suitable for workers who do not get a regular monthly pay cheque.
Some lenders still allow borrowers to have an interest-only mortgage, but at a price, potentially negating the savings the scheme should create.
Halifax, the country’s largest mortgage lender, has recently added an extra 0.2% in fees to its range for borrowers who opt for an interest-only deal. In March, it made the same rise with its tracker range, but some analysts believe this is just another way of punishing home owners who are struggling to afford monthly repayments.
Halifax said the decision aims to reward responsible customers that are repaying capital. This is a noble aim but doesn’t explain quite how they are rewarding one group of customers by penalising another.
In a similar move, Lloyds has increased the threshold for anybody wanting to get an interest-only loan and increased rates by 0.2%. It is also introducing an upper limit which means it will refuse an interest-only mortgage of more than £500,000.
Analysts believe that once gone, interest only mortgages are unlikely to reappear on the market because the Financial Services Authority (FSA) has, justifiable, deemed them to be higher risk than repayment loans.
The FSA has issued a warning recently that home buyers who take out interest-only mortgages are simply creating large problems for themselves in the future because they fail to plan for how to pay down the capital.
This development is a prime example of large financial institutions claiming to be doing the right thing while lining their own pockets. They should be stimulating financial responsibility by rewarding people who pay down the mortgage amount but instead they are punishing people who want or need to switch to an interest-only mortgage.
