NatWest and RBS will no longer offer new residential interest-only mortgages to buyers from Monday.
NatWest and Royal Bank of Scotland (RBS) are the latest lenders to pull out of the interest-only mortgage market. From Monday 3rd December they will no longer offer this type of mortgage to residential buyers.
Buy-to-let mortgages will still be available on an interest-only basis and existing borrowers set up on this arrangement will not be affected by the change.
But this move is the latest sign that the interest-only mortgage market is closing up, leaving existing borrowers limited choices if they need to remortgage.
Narrowing options
Over the past year lenders have either toughened up their criteria or dropped out of the interest-only mortgage market entirely.
In February Santander announced it would only lend on an interest-only basis on up to 50% of the property’s value. And around the same time Lloyds said it would no longer accept cash savings, like Cash ISAs, as a repayment method.
Derbyshire, Cheshire, Yorkshire, Dunfermline and Coventry Building Societies have also adjusted criteria on these sorts of loans.
In October RBS decided to only offer interest-only on an advised basis rather than in a branch or over the telephone.
But now the lender, along with its NatWest brand, joins Nationwide and the Co-operative on the growing list of lenders that are withdrawing from the market entirely.
The changes are a reaction to the recession and credit crunch. Although they may protect new buyers, it leaves those who have taken out an interest-only mortgage with limited options.
The worry is that those already with an interest-only mortgage will become prisoners unable to move onto a new deal when rates rise.
The problem with interest-only
Interest-only mortgages are much higher risk than repayment loans.
The method of borrowing allows a buyer to get a home loan and only pay off the interest each month instead of a mix of capital and interest.
This means lower monthly repayments, but only works if buyers have a plan in place to pay off the amount borrowed in one lump sum when the mortgage term ends.
Pre-credit crunch this sort of mortgage was approved without much thought going into how this debt might be paid off by the borrower.
The result according to recent research from data company Xit2 is that there are £160 billion-worth of interest-only mortgages due to mature in the next eight years that have no repayment plan in place.
The Financial Services Authority is currently reviewing interest-only mortgages, and will publish its findings in 2013, but it has already stated that the responsibility of repaying the loan rests solely with the borrower and not the lender.
What to do
If you have an interest-only mortgage and are worried about how to repay it or about the narrowing options available to you, act now. Read: Your options if you're struggling to pay off your interest-only mortgage for some ideas on what you can do.
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