The Times - UK (2020-10-17)

64 1GM Saturday October 17 2020 | the times

Money

Many homeowners need cheaper loans

Nationwide have agreed to allow some

struggling customers to only pay inter-

est on their loans.

For HSBC borrowers, interest-only

will be available for no more than six

months, and arrears would need to be

cleared within 12 months. The tempo-

rary switch would not affect the cus-

tomer’s credit file.

HSBC’s standard interest-only lend-

ing policy would kick in if a customer

wanted to switch to an interest-only

mortgage permanently, at which point

they would need to show that one appli-

cant earned at least £100,000 a year,

that the loan had a maximum loan to

value (LTV) of 75 per cent, and that the

borrower had a suitable repayment

strategy in place.

Nationwide is offering mortgage

members a conversion to interest-only

as a short-term forbearance option

“where appropriate... to minimise the

long-term impact on their finances”. It

is also reviewing its interest-only policy

for new and existing members.

Coventry Building Society last

month re-entered the interest-only

mortgage market. Customers can con-

vert to interest-only on a temporary or

permanent basis, depending on

their ability to clear the debt at

the end of the loan term.

The society said that it

shouldn’t be seen as a

way of just reducing

monthly payments,

but rather a way of

managing their

money and assets in a

different way.

Coventry is one of the

few lenders (Accord

Mortgages, part of York-

shire Building Society, is

another) that does not

have a minimum income

requirement for new in-

terest-only customers,

but you cannot borrow

more than half the

value of your home

and must have at least

£300,000 equity.

Acceptable repayment

strategies include the sale

of investments, using a pen-

sion lump sum or selling your

home.

Most lenders require between

£200,000 to £300,000 equity in a home

for new customers wanting interest-

only loans, and they won’t lend above

50 per cent of its value. Some will let

you top up the remainder with a repay-

ment mortgage to 75 per cent LTV.

Many have minimum income require-

ments of £100,000, although Andrew

Montlake from Coreco Mortgage Bro-

kers says that the Bank of Ireland just

needs one applicant earning £50,000,

while Barclays requires one person to

earn at least £75,000.

Mark Harris, chief executive of the

mortgage broker SPF Private Clients,

sounded a note of caution. “Some of the

issues around interest-only mortgages

came from borrowers being granted

them when they shouldn’t have been,

simply to boost affordability,” he said.

end of October, however, as the gov-

ernment’s enforced period of mort-

gage-repayment holidays owing to cor-

onavirus comes to an end.

From November banks will no longer

be obliged to grant someone in finan-

cial difficulty respite from their mort-

gages, but lenders believe that many

people will still find it hard to make pay-

ments. Some banks have said they will

offer the chance to move to temporary

interest-only deals to prevent hardship.

Almost two million people have

taken a mortgage-payment holiday

since March, when the government

forced lenders to offer them and

banned home repossessions as part of

its Covid-19 support measures. The end

of these requirements, which will co-

incide with the introduction of a less

generous job support package, has led

to fears that many people could fall into

arrears or lose their home.

Christopher Woolard, the interim

chief executive of the Financial Con-

duct Authority (FCA), said that it was

“very important that consumers who

can afford to resume mortgage pay-

ments should do so for their own long-

term interests and so that help can be

targeted at those most in need”.

Nevertheless, FCA guidance says

that some banks should continue to of-

fer mortgage-payment holidays to the

financially vulnerable beyond October,

as one option in a package of “tailored”

long or short-term support.

“Lenders understand that many

households’ finances will continue to

be squeezed as the pandemic continues

and will be offering a range of

support for those who need

it,” said Eric Leenders

from UK Finance, a

body that represents

the banking industry.

UK Finance said

that there was no

“one-size-fits-all ap-

proach”, but that

measures could in-

clude temporary inter-

est-only payments and

extended loan terms.

At the height of their

popularity interest-only

mortgages were often

sold alongside a sav-

ings plan such as an

endowment that

would generate

enough return to pay

off the outstanding

capital. However,

these endowments

were widely mis-sold

and many failed to pay out

as much as promised. Other

borrowers failed to make prepara-

tions for paying off their loan, with

some banking on house-price growth

to generate enough equity so that they

could sell up, settle the mortgage and

still buy something else.

There were still more than 1.3 million

full or partial interest-only mortgages

outstanding at the end of 2019, accord-

ing to UK Finance. The FCA is con-

cerned that a lack of savings or realistic

means of paying these loans mean that

a large number of people are at risk of

losing their homes.

In 2008, 44 per cent of mortgage ap-

provals were on an interest-only basis,

with a further 6 per cent being a mix of

interest-only and capital repayment.

By this year those figures were 8 per

cent and 3 per cent respectively, but 15

per cent of all outstanding UK mortga-

ges are still interest-only. HSBC and

Get ready for the return

of the interest-only loan

Lenders are becoming

more flexible with

homeowners who need

some mortgage help,

says Laura Whateley

T

he interest-only mortgage

could be set for a comeback as

banks try new ways of helping

borrowers whose incomes

have shrunk.

In the 1990s, interest-only mortgages

(where borrowers pay back just the

interest and none of the capital) were

the most common type of loan, but they

almost died out when millions of home-

owners had no means of paying off

their debt at the end of the loan term.

Lately they have become the pre-

serve of the wealthy, with only those

with a salary of at least £100,000 and

vast amounts of equity in their property

able to qualify.

This could be about to change at the

1.3m

borrowers on

interest-only at the

end of 2019

£75k

income needed

for a Barclays

interest-only loan

15%

of mortgages in the

UK are interest-only