Sale of property acceptable repayment option.
Leeds Building Society has launched a new range of interest-only mortgages.
An interest-only mortgage is a special type of deal that allows borrowers to pay just the interest on their loan each month instead of the mix of capital and interest required on repayment mortgages. This makes monthly repayments much lower, but means at the end of the mortgage term interest-only borrowers need to repay all of the capital borrowed in one lump sum.
They were very popular during the boom years but recent times have seen lenders severely tighten their criteria or withdraw them from sale entirely.
The new deals
Borrowers now have the choice of a two-year fixed rate at 2.49%, a five-year fixed rate at 3.19% or two-year discounted variable rate currently at 2.30% (3.39% off the society’s standard variable rate).
The deals are available for purchase and remortgage on loans up to a maximum of £500,000. However, only borrowers with at least 50% equity will be eligible to apply.
The deals attract a £199 booking fee, but there are no arrangement or higher lending charges to worry about, plus each product comes with a free standard valuation (up to £335) and fee-assisted legal services for standard remortgages.
Borrowers will be able to make overpayments of up to 10% each year without paying a penalty. But tapered early repayment charges of up to 5% apply if you pay off the mortgage early.
How the deals compare
The new deals from Leeds aren't market leading at this loan-to-value.
Monmouthshire Building Society for example offers a two-year fixed rate of 2.25% with a £499 fee on a 50% LTV.
However there is something about the Leeds mortgages that set them apart. When you take out an interest-only mortgage now, you have to explain exactly how you will pay off the outstanding capital at the end of your loan's term. And lenders have got a lot stricter about what they will accept as a repayment plan.
These Leeds mortgages allow ‘sale of property’ as a repayment plan, something very few lenders accept nowadays.
Relying on selling the property is a risky move as it depends on a property retaining or increasing in value and the assumption that there will enough left over to buy a downsized property. If the value of your property drops, you may end up owing more than it is worth.
[SPOTLIGHT]However, Leeds Building Society is restricting this sort of repayment plan to borrowers with a lot of equity in their home. It will only allow 'sale of property' as a valid method to repay a loan if you have at least £150,000 equity at the point of application.
Other acceptable repayment methods for the interest-only deals are an endowment, a cash lump sum from a personal or occupational pension, an equity ISA or the sale of an investment property or second home.
Why the deals are important
The new interest-only deals from Leeds Building Society bring some extra choice to new and existing interest-only borrowers in what it calls an "under served" market.
Since the financial crisis many lenders have tightened their interest-only criteria or withdrawn from the market altogether, leaving very few options for interest-only borrowing.
Apart from Monmouthshire and Leeds only West Bromwich Building Society, Santander and Teachers Building Society still provide interest-only mortgages at 50% LTV and only through brokers. Progressive Building Society offers deals at a 50% LTV but only to borrowers in Northern Ireland.
Helping interest-only borrowers
Last year it was estimated that around £160 billion-worth of interest-only mortgages due to mature in 2020 have no repayment plan in place.
Lenders have been pushed to begin contacting these borrowers to warn them of the looming deadline for their debt and to outline their options such as switching onto a pure repayment mortgage.
If you have an interest-only mortgage and are worried about how you will pay back your loan read: Your options if you're struggling to pay off your interest-only mortgage and Interest-only mortgages: the banks that will still lend.