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Availability of interest-only mortgages

This article is part of
Guide to interest-only mortgages

Availability of interest-only mortgages

In 2007, just before the global financial crisis saw lenders retract from the market en force, interest-only mortgage sales equated to one-third of all mortgage sales.

According to data from the Council of Mortgage Lenders, this was the interest-only market peak but, as the first article showed even then this type of loan was already facing regulatory headwinds and the prospect of new rules such as the Mortgage Market Review.

While many high street banks such as HSBC pulled out, other more niche lenders remained. These include Virgin Money, Aldermore, private bank Coutts and various building societies.

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The market contraction has made shopping around more difficult for the average consumer - and sometimes frustrating brokers attempting to get the best possible solution for their higher net-worth clients.

Jonathan Harris, director of London-based Anderson Harris, says: “The previous climate was irresponsible so the changes were welcome, but there are still some borrowers perfectly suited to interest-only, such as those in receipt of predominantly bonus-driven remuneration.

“We have gone from one extreme to another. Things had to change but the pendulum has swung too far.”

Competition

Competition from the smaller lenders and building societies, combined with better terms and conditions and tighter lending criteria, may see some banks start coming back to the market with interest-only or hybrid options.

Not everyone is returning but, as Jaedon Green, director of products and distribution for Leeds Building Society, says, this is a sign of a good market. “It should be expected different lenders are active in different areas as part of a healthy and competitive market.”

Any improvement in availability will be a slow process, as Roland McCormack, intermediary director for TSB, explains: “With some smaller lenders recently relaxing lending criteria and winning market share, some banks are now re-entering this space and adjusting their own criteria.

“However, lenders are likely to remain cautious, despite the suitability of an interest-only product for some groups, such as high earners with irregular income.”

TSB is a relative newcomer, having launched in September 2013, after being divested from Lloyds Banking Group. It offers interest-only mortgages, subject to customers meeting qualifying repayment strategy criteria and having a loan-to-value (LTV) up to 75 per cent.

Currently, Bank of Ireland offers up to 60 per cent LTV, with rates starting from 1.5 per cent.

Aldermore considers owner-occupier interest-only applications for up to 75 per cent LTV, and 80 per cent for most buy-to-let properties.

Other lenders have started to return. NatWest, for example, pulled out in 2013, but as FTAdviser reported last year, Natwest Intermediary Solutions reintroduced residential interest-only mortgages for new business from 21 September 2015, with a maximum loan-to-value of 75 per cent.

Applicants need a single gross annual income of at least £100,000, excluding discretionary bonuses, and have an acceptable repayment strategy in place. There are restrictions if the borrower intends to sell their home to repay the loan.