Interest only loans do serve a purpose

An industry expert has stated recently that interest only loans do serve a purpose and can prove invaluable for some borrowers. Her comments came as lenders clamp down on interest only loans and the UK’s finance regulator, the Financial Services Authority sets up new proposals that could wipe out these interest only loans altogether.

The FSA is putting together proposals that would see interest only mortgage loans coming to an end, with lenders being told that they will have to continue asking for large deposits and other measures being proposed that could seriously affect the ability of many people to get a mortgage.

Paula John from Your Mortgage said that the FSA was right in trying to put together regulations to stop irresponsible lending and reduce the risk of consumers taking out loans that they could not afford to repay. However, she also said that it was important to take into consideration that interest only loans did serve a purpose and could prove invaluable for some people.

Her comments came after a statement was made by the Intermediary Mortgage Lenders Association, which said that if the FSA regulations were put into force interest only loans could be made obsolete.

Ms John added that whilst it was right of the FSA to express concern over borrowers taking on mortgages and loans that they could not repay it was also a valid point by the IMLA that it could be a mistake to get rid of interest only mortgages altogether because some people could really benefit from them.                               

She stated: “I think [the IMLA] is right in sounding a warning bell that we could throw the baby out with the bath water and see the end of interest-only mortgages altogether.”

Tags: FSA regulations, whilst, mortgage loans, business, finance

Homeowners being moved from interest only mortgages to repayment mortgages

The fears over a double dip recession in the UK are causing havoc for many homeowners who are finding themselves being shifted from interest only mortgages with smaller monthly repayments to capital and interest mortgages that require them to make much higher monthly repayments on their mortgages. For many this will cause serious financial problems, as it will really impact on their outgoings and ability to make repayments.

A number of lenders are said to have brought in new rules and regulations with regards to this issue, and this includes the Spanish owned Santander and the banking giant Halifax. Many borrowers who do not have enough equity in their homes and are coming to the end of an interest only special deal are being shifted onto the more costly repayment mortgage by these lenders.

The move comes following concerns that the UK could be heading for a double dip recession, and a number of industry experts have said that homeowners could lose the equivalent of the average salary from the value of their homes, which will see equity levels plunge further for many homeowners. Santander has revealed that anyone that has less than 25 percent equity in their homes will be moved from their interest only mortgage onto a repayment one.

One mortgage expert said: “For home owners with interest-only mortgages, a forced switch onto a repayment deal by their lender at the end of their fixed or discounted period would lead to a significant rise in their monthly payments. For those saddled with big mortgages, it may well be an unaffordable increase, making it difficult for them to make ends meet. Lenders are worried about a further downturn in prices and are introducing these changes to protect themselves, as well as borrowers. But hard-pressed homeowners may find it’s an extra cost too far.”

Tags: Mortgage loan, fears, Repayment mortgage, mortgage, Many borrowers, santander

Lloyds cracks down on interest only mortgages

Over the years interest only mortgages have become popular amongst certain property purchasers, such as first time buyers that want to keep repayments down and those on lower incomes. With interest only mortgages the borrower repays only the interest on the loan over the specified term, which means that at the end of the term the actual loan itself still needs to be repaid.

The idea is that when these mortgages are taken out the borrower also sets up another investment so that over the years they can raise the money to pay the loan off in full at the end of the term. However, officials believe that many people that took these mortgages out had no plans in place to save for repayments of the loan at the end of the term, and many were simply relying on the value of their property increasing sufficiently to sort out the loan.

Lenders have become far more cautious about taking risks over the past couple of years, since the onset of the global credit crisis, and according to recent reports have now started to crack down on risky interest only mortgages. Many lenders have been reluctant to deal with interest only mortgages for some time, but more and more are now set to become wary of these deals according to reports.

One banking giant, Lloyds TSB, is said to have already started its crackdown on interest only mortgages, and has placed a cap on the amount that customers can borrow without repaying the capital. It is now thought that other lenders will quickly follow suit in terms of clamping down on these mortgages.

An official from Savills Private Finance commented on these interest only mortgages, stating: ‘Lenders see them as being extremely risky, and they would much prefer everybody to have a repayment deal. There will be fewer and fewer of them, and they could eventually disappear.’

Tags: tsb, finance, Interest-only loan, mortgage, Mortgage loan

‘Risk element’ to interest only mortgages

Customers choosing to invest in an interest-only mortgage risk falling into negative equity if housing prices drop after they have secured the loan, a finance expert has warned.

Re – Financial Planning explained that clients taking out insurance-only mortgages, which allow them to just pay back the interest on the sum borrowed and repay the original capital debt upon the sale of a property, would lose less money each month through mortgage repayments but face extra risk.

Not only would they still have the original loan repayment hanging over their heads, but they could be left owing their mortgage provider money after the sale of their property if house prices had fallen instead of climbed, explained David Higgins, director of Re – Financial Plannign.

“Any client taking on an interest only mortgage is adding an extra dimension of risk over and above what they would normally have with a capital repayment mortgage,” he said.

“I think mortgage lenders are more lax than they’ve ever been. The high property prices have lulled them into a false sense of security. They know that even if the person doesn’t have the means to pay off the mortgage that they have adequate security.”

According to MoneyFacts.co.uk, the recent credit crunch is starting to effect the buy-to-let sector, as providers begin to tighten credit criteria, raise fees and a withdraw products from the market.

Tags: mortgage repayments, element, security, extra dimension, money, Real estate, Real estate pricing, Interest-only loan

First ever 25-yr fixed-rate mortgage

A new mortgage has been launched that could help first-time buyers get onto the property ladder.

Nationwide Building Society is offering a 25-year fixed-rate mortgage which will see buyers protected from future interest rate rises.

The firm has announced that the mortgage comes with a 5.49 per cent fixed interest rate and borrowers can opt out of the mortgage after ten years without having to pay a penalty fee.

Nationwide is promoting the new deal to everyone but first-time buyers are likely to see the biggest benefits.

“At Nationwide we are totally committed to our members because we have no shareholders to please,” commented Stuart Bernau, executive director at Nationwide.

“Our new 25-year fixed-rate mortgage is a clear demonstration of this. It not only offers long-term good value to borrowers looking for the security of fixed payments but also the flexibility of a ten-year deal.

“This is the latest in a series of initiatives that have been designed to complement our existing mortgage product range,” he added.

The new mortgage has been welcomed by many people although some argue that better deals are still available, with many shorter-term loans offering better rates.

If you are considering getting a mortgage make sure you seriously consider which deal is best for you.

Tags: Interest-only loan, year, new deal, rate, Everyone