Banks tighten interest-only policies

Northern Rock has become the latest high-street lender to tighten its policy on interest-only lending following a similar move by Lloyds Banking Group last month – but borrowers can still find attractive deals elsewhere.

“Interest-only mortgages are becoming more difficult to obtain as lenders clamp down on what they regard as ‘riskier’ borrowing,” says Melanie Bien, of Private Finance, the mortgage broker.

From this week, Northern Rock will no longer accept inheritance, dividends, regular overpayment, remuneration bonus or intention to convert to repayment at a future date as repayment strategies.

It has also ruled out the sale of a property as a repayment vehicle for loans over 60 per cent loan-to-value (LTV) or where the borrower has less than £150,000 equity in the property.

The move follows Lloyds’ announcement last month that it would no longer offer interest-only repayments if more than £500,000 is being borrowed. The lender also tightened its list of acceptable repayment vehicles and said it would no longer accept an inheritance or a sale of a house or business.

Interest-only deals are often taken out by wealthier borrowers, who use bonuses to pay off the capital in chunks. “This is more cost-effective than a repayment mortgage where the capital is paid back typically over 25 years so ends up being more expensive than if the borrower clears it over a shorter time frame,” explains Bien.

But most high-street lenders now only accept an endowment policy, pension plan, stocks or unit trusts as repayment vehicles for interest-only loans.

Northern Rock, Abbey, Woolwich/Barclays and Coventry Building Society will lend only up to 75 per cent LTV, says David Hollingworth of London & Country Mortgage Brokers.

The best buy two-year tracker rate on the high street is available from ING at 2.39 per cent – bank base rate plus 1.89 per cent – with a £945 fee. The deal has a maximum loan size of £1m and is available up to 60 per cent loan-to-value.

For those looking for a larger LTV, Yorkshire Building Society has a two-year tracker at 3.69 per cent – bank base rate plus 3.19 per cent – available up to 85 per cent. There is a £995 fee and a maximum loan size of £1m.

Co-op/Britannia has the best buy five-year fixed-rate at 3.99 per cent, available up to 75 per cent LTV. It comes with a £999 fee and is available up to £1.5m.

Private banks remain the best option for borrowers taking out a larger interest-only loan. Barclays Wealth has interest-only rates for loans above £1m at up to 85 per cent LTV. It has a five-year tracker at 2.74 per cent – bank base rate plus 2.24 per cent – with a 0.5 per cent fee, available up to 85 per cent. Its five-year fixed rate is 4.99 per cent with a 0.5 per cent fee.