Banks are starting to offer this type of controversial finance again — and almost anyone can apply
Interest-only mortgages, usually available to wealthy homeowners, are about to become an option for everyone for the first time since the financial crisis.
These loans all but disappeared from the mortgage market after the credit crunch, when they were considered part of the irresponsible lending that led to the financial crisis.
Since then they have made a gradual reappearance, but were limited to people with high incomes and deposits who could demonstrate a clear method of paying back the loan other than having to sell the property.
This week, however, Santander announced that it will be withdrawing its £50,000 salary requirement (£70,000 for joint incomes) for an interest-only mortgage within the next two to three weeks. The bank is also to increase the age limit for borrowers from 65 to 70. However, it is likely to require a 25 per cent deposit, and equity of at least £150,000 in the property if it is used as the repayment vehicle.
“Interest-only may not be right for everyone, but appetite has grown in recent years,” says Miguel Sard, the managing director of mortgages for Santander UK. The monthly savings from paying off only the interest, but not the capital, can be considerable. For example, you can save £20,000 a year in repayments on a £500,000 mortgage at a rate of 1.84 per cent.
It is a move that has shocked other lenders who may have to follow suit, says Aaron Strutt, of the Trinity Financial Group. “Up until recently lenders have been constantly lowering their rates to increase business. We’ve reached a point where rates can’t go any lower, so they have to ease their criteria.”
Lenders are also feeling the pinch because the number of buy-to-let loans has fallen and the housing market is slowing in some areas. Santander’s latest management quarterly update showed a fall of £1.2 billion in net lending over the previous year, from £2.7 billion to £1.5 billion.
According to the Council of Mortgage Lenders (CML), only 1 per cent of people applying for a new mortgage managed to obtain an interest-only loan. This figure rose to 4 per cent for people who remortgaged.
Last year Halifax, the UK’s largest and most cautious bank, accepted the sale of a mortgaged property as a way of paying off an interest-only loan. It was a massive change of heart from a lender that previously required borrowers to have a pension pot of £1 million as a repayment vehicle.
The CML says the number of interest-only loans fell from 2.5 million in 2012 to 1.7 million in 2015. Some people who managed to get an interest-only mortgage in 2012 are struggling to remortgage to another interest-only loan, so Santander’s announcement may well come to their rescue.
Alan Smith, is in this situation. He is worried that he will have to sell his house in Littlehampton, West Sussex, where he has lived with his wife, both 73, for the past 25 years. “We remortgaged some years ago and have an interest-only mortgage that expires next year,” says Mr Smith, who is a surveyor. Their house is worth £300,000, with £193,000 outstanding. The only way we can make repayments is to sell the house, but we don’t want to and are desperate to find a way of staying. We have already asked the lender if we can extend the mortgage, but it wasn’t able to help. Ideally we need somebody to buy the property and to allow us to rent if from them.”
Interest-only best buys
0.99 per cent fixed for 18 months with 40 per cent deposit and £1,499 fee. Minimum £50,000 income or £70,000 joint. Equity of £150,000.
1.44 per cent fixed for three years with a 40 per cent deposit and £999 fee. One applicant needs to earn £100,000 and a valid repayment vehicle is required.
1.79 per cent five-year fixed with a 40 per cent deposit and £999 fee. One salary of £100,000 and a valid repayment vehicle is required.
1.19 per cent two-year tracker with 40 per cent deposit and £995 fee. No minimum income but there are strict criteria for the repayment vehicle.