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Why the interest only mortgage is alive and well – if you know where to look

20th Oct 12
Islay Robinson GROUP CEO

Islay Robinson

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Why the interest only mortgage is alive and well – if you know where to look
GROUP CEO

Islay Robinson

Are you struggling to agree your high value mortgage on an ‘interest only’ basis? If so, you’re not alone. One of the UK’s major lenders has this week abolished interest only loans while others continue to restrict access to this type of deal.

However, for many high value mortgage clients, interest only loans are the ideal way to arrange their finances. And, there are interest only deals available – if you know where to look.

Nationwide abolishes interest only mortgages

Interest only mortgages grew in popularity in the years before the credit crunch. They require you to pay interest on your large mortgage but none of the capital. This means that your outstanding mortgage balance will always remain the same unless you take other steps to reduce it.

Figures from the Council of Mortgage Lenders show that one in three mortgages were taken out on an ‘interest only’ basis in 2007. However, this type of large mortgage arrangement is increasingly hard to obtain through a mainstream lender.

Nationwide has become the first major lender to stop interest only lending. A spokesperson for the lender said: “Interest only mortgages are only a tiny amount of new mortgages for Nationwide. We consider them to be a niche product and Nationwide is a mainstream lender.”

Other lenders have also recently tightened their criteria. Several lenders including Santander have reduced the maximum ‘loan to value’ for interest only loans while the Royal Bank of Scotland will now only sell an interest only mortgage on an ‘advised’ basis.

The Bank said: “We will require any customer applying for an interest only mortgage to provide evidence of their repayment vehicle. The advised sales process enables us to fully understand the customer’s circumstances before making an interest only recommendation”.

Experts have been critical of the Nationwide’s decision to scrap interest only loans entirely. Writing in the Daily Mail, Simon Lambert called the building society ‘the latest big mortgage lender to use a sledgehammer to crack a nut’ while mortgage expert Andrew Montlake called the move ‘an over-reaction to a shrinking section of the market where sensible changes have already taken place.’

Hugh Wade-Jones, director of London mortgage broker Enness Private Clients, said: “For many high net worth mortgage clients, an interest only mortgage is the perfect arrangement. Many high value mortgage clients have assets including investments and other property, bonuses, retained profits, dividends and commissions which they intend to use to repay their large mortgage. Asking them to commit to a repayment mortgage and pay more on a monthly basis seems ludicrous when they have a carefully determined and managed repayment vehicle in place.”

As more and more mainstream lenders withdraw from the interest only market, Mr Robinson believes that other non-traditional lenders will take their place. He added: “We’ve spent five years developing relationships with private banks in the UK and overseas. These banks have an appetite to lend to high value mortgage clients and have the underwriting capability to understand that interest only loans are suitable and, indeed, advisable for certain types of client.”