Mortgages 

Interest-only mortgage boost from Leeds

Interest-only mortgage boost from Leeds

Leeds Building Society has made changes to lending criteria for interest-only mortgages.

Richard Fearon, chief commercial officer of Leeds Building Society, said: “We have made a committment to serving those parts of the mortgage market which we believe are currently underserved.

“Interest-only mortgages have become underserved and we believe it is right to commit more to this lending space.”

The society is increasing its maximum loan-to-value (LTV) from 50 per cent to 60 per cent on all interest-only mortgages.

This includes its part-and-part mortgage ranges, which are available up to 75 per cent. Part-and-part customers can get up to 60 per cent LTV as interest-only and the remainder on a capital and repayment basis.

There will also no longer be a minimum income requirement, and the society will accept the sale of the property as a method of repayment.

Mr Fearon said: “Interest-only has become the domain of the wealthy but we believe product is useful for the mass affluent too, the self-employed, and those wanting more flexibility.”

There will still be an affordability test, but this will be on the same basis as a full capital repayment mortgage. Affordability is stress-tested based on different interest rate rise scenarios, up to approximately 7 per cent.

Mr Fearon said the decision to bolster its interest-only range came about during Leeds Building Society’s directors’ conference earlier this year.

After the 2008 credit crisis, many lenders cut back on interest-only lending, especially in 2012 and 2013 when the City regulator started to scrutinise the sector.

In 2013, the FCA published a 49-page report, Residential Interest-Only Mortgages from Experian, and a 149-page report by GfK, called Interest-Only Mortgages - Consumer Research.

The findings included:

■ By 2020, approximately 600,000 borrowers will see their interest-only mortgage mature.

■ Just under half of all interest-only borrowers are modelled as likely to have a shortfall.

■ A third of the 2020 shortfalls are expected to be more than £50,000.

This regulatory attention, coupled with an already squeezed lending market in the wake of the financial crisis, led to tighter restrictions being imposed as part of the 2014 Mortgage Market Review (MMR).

As a result, many lenders withdrew from the market altogether, citing tough new affordability measures and regulatory scrutiny as reasons, although as the Council for Mortgage Lenders data revealed, interest-only stock still makes up a significant slice of the mortgage market.

CML data as at the end of 2015 revealed interest-only stock totalled £238bn, £208bn of which was pure interest-only.

Mr Fearon added: “We never left the interest-only market and I would imagine we will see other lenders get interested in coming back to the market over time.”

Who’s in the interest-only market?

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 although you need a minimum income.

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