Interest-only mortgages blocked

Debt charities have accused banks of failing to uphold Gordon Brown’s promise that repossession would be a ”last resort” for insolvent homeowners.

Cheltenham & Gloucester, part of Lloyds TSB, has attracted criticism by announcing that borrowers cannot move from repayment mortgages to interest only loans, which offer lower monthly payments.

Advisers said Lloyds TSB had “shot itself in the foot” by making the announcement at a time when the government was putting pressure on banks to be more sympathetic to those in arrears.

However estate agents and brokers said restricting interest only loans was prudent. Falling house prices mean borrowers who do not reduce the size of their loan through repayment mortgages are at risk of negative equity and could have difficulty refinancing their property in the future.

Lloyds TSB’s decision follows similar moves by Abbey and Woolwich to restrict borrowers from switching to interest only mortgages unless they have strict repayment plans in place.

Melanie Bien, director of Savills Private Finance, said borrowers were under more pressure from rates than changes to interest only mortgage criteria. More than half of all lenders have so far failed to pass on the interest rate cut in their standard variable rates and many have increased margins on tracker rates.

The number of homes repossessed rose 71 per cent in the second quarter of 2008 compared to the previous year, as homeowners reaching the end of cheap two year fixed rates struggled to find affordable deals.

Guidelines issued last week by the judiciary, in conjunction with mortgage lenders, set out ways in which mortgage arrears might be settled without court action in order to reduce this trend.

Lenders will be required to consider a reasonable request from borrowers to change the date or method of their payment, but will not be under any obligation to allow borrowers to switch mortgage deals.

However brokers say they expect banks to be flexible with those facing repossession.

“The last thing lenders want to do is repossess property,” said Ray Boulger, senior technical manager at mortgage broker John Charcoal. “As well as the extra hassle, the net sale price of a repossessed property is likely to be 10 or 20 per cent below average. They know they will lose money.”

Although the number of new mortgage contracts is on the rise, lenders are still exercising caution by maintaining a tight restriction on lending criteria in order to minimise future risk on their mortgage books.

This week The One Account removed products offering more than 75 per cent loan to value, and Cumberland Building Society reduced maximum LTV for buy to let products to 50 per cent, according to data from www.moneysupermarket.com.