Lloyds Banking Group has become the latest high street lender to tighten its rules on interest-only mortgages, following a clampdown on these type of loans by Santander last week.

From Thursday, Lloyds will no longer accept cash savings, including individual savings accounts (Isas), as an acceptable way to repay the mortgage at the end of the term. The changes will apply to all new interest-only applicants, and existing customers seeking to “port” their mortgage deal to a new property.

The announcement follows stricter rules introduced by Santander on Friday. The Spanish bank was the first high street bank to insist that borrowers now need a deposit – or equity – of at least 50 per cent to receive an interest-only loan. Most other lenders will still lend up to 75 per cent of a property’s value on an interest-only basis.

In response to the clampdown, mortgage brokers warned that rival lenders would follow Santander and make it harder for homeowners to take out an interest-only mortgage. Over the past two years, banks and building societies have been gradually introducing stricter criteria over who can take out an interest-only loan following moves by the financial regulator to stop borrowers taking on more debt than they can afford.

While Lloyds will still lend a maximum of 75 per cent loan-to-value on interest-only mortgages, it has significantly restricted its list of acceptable repayment vehicles. Barclays/Woolwich is the only other lender that will not accept cash savings as a repayment vehicle.

Mark Harris of SPF Private Clients, a high-end mortgage broker, believes cash in an account or an Isa with the aim of covering the capital at the end of the term should be considered a feasible repayment strategy.

However, a Lloyds spokeswoman said cash savings were “too fluid” and not a long-term repayment strategy such as investment plans.

“This is hugely disappointing news, but no surprise. It’s like a pack of cards; once one lender tightens its interest-only policy as Santander did, then the others follow,” said Harris.

Lloyds has also imposed tougher rules on how it calculates the affordability of its accepted repayment vehicles. It will now only lend up to 80 per cent of the current value of any stocks and shares Isas, unit trusts, equities or investment bonds. In addition, the current value of the fund has to be over £50,000 to be deemed an acceptable repayment vehicle.

For example, a customer with £100,000 in a stocks and shares Isa would only be given a mortgage of £80,000 from Lloyds.

Meanwhile, a borrower who wants to use their pension fund as a repayment vehicle can only do so if the value of the fund is over £1m, and only up to 25 per cent of the current fund value can be used.

Last month, Barclays/Woolwich imposed similar restrictions. It said acceptable repayment vehicles must have been in existence for over 12 months, and that it would no longer take into account the potential growth of any investment plans when deciding how much it would lend to a customer on an interest-only basis.

“The recent interest only criteria changes from Woolwich, Santander and now Lloyds Banking Group are being driven by the draft Mortgage Market Review published by the Financial Services Authority in December,” noted Ray Boulger of John Charcol, the mortgage broker.

“The FSA has said it wants to consult further on interest only mortgages but the current draft MMR puts so much responsibility on lenders to make sure any investment plan will produce sufficient funds to pay off the mortgage that lenders are not prepared to take the risk of being sued by borrowers for any shortfall,” he explained.

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