Lenders clamp down on interest-only mortgages

Mortgages and Home

Updated on 16 February 2012 | 6 Comments

It's getting tougher for borrowers to get hold of interest-only mortgages, with two lenders tightening up their criteria.

Two major mortgage lenders have significantly tightened up their rules on interest-only mortgages.

When taking out an interest-only mortgage, most lenders insist that you tell them about your planned repayment vehicle – that's the way you will get together the cash to pay off the capital side of the mortgage at the end of your mortgage term.

Lloyds Banking Group will now no longer accept cash savings, including things like ISAs, as a repayment vehicle. This change applies to both new interest-only applicants, and existing customers who want to ‘port’ their mortgage across to a new property.

According to Lloyds, cash savings are not a long-term repayment strategy, compared to going down the traditional investment route.

Lloyds has also revamped the way it will calculate the affordability of the repayment vehicles it does accept. It will now only lend up to 80% of the value of the repayment vehicle. So if you have investments worth £100,000, the bank will lend no more than £80,000.

The move from Lloyds follows Santander’s decision last week to restrict interest-only mortgages to applicants with a deposit or equity stake of 50%.

More: What's wrong with an interest only mortgage? | How to rent out your home

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