UK homeowners have been advised to switch to repayment mortgages, as many experts cautioned that interest-only mortgage deals are now at risk.
Lloyds TSB said that customers looking to borrow over £500,000 must make capital repayments. Sales of a business or house are being removed, as well as inheritance from the list of acceptable repayment vehicles.
“The days of interest-only mortgages are numbered,” said Melanie Bien, a real estate broker from Savills Private Finance.
“Lenders are moving away from interest-only towards repayment mortgages because these are regarded as lower risk.”
She added that “while Lloyds is targeting borrowers taking out loans of more than £500,000 for now, it is only a matter of time before all borrowers opting for interest-only are restricted in the loan-to-value, and will face more pressure to demonstrate how they intend to repay the loan.”
The interest-only loans, which borrowers only repay the interest rate but not the capital, became popular as many of them availed this trend to keep monthly repayments down during a property boom. But while most homeowners in the 80s took out an endowment plan to repay the capital when their home loans ended, many who took the interest-only route have recently gambled on the soaring property prices and cashing in equity.
“Interest-only deals have grown in popularity so we decided now is the time to have a look at the products, procedures and pricing to ensure they reflect the fact interest-only is higher risk to both us and the customer,” said a spokeswoman for Lloyds.