One of the biggest changes in the Mortgage Market occurred a few days ago when the massive Lloyds Banking Group announced that they will no longer provide loans on an interest only basis above £500,000.
Given that it is the very customer base who most want to use interest only this is quite a big deal.
They have also gone further with loans below £500,000 in that applicants can no longer just say they will pay the loan off via the sale of the property, their buy-to-let portfolio or general bonus payments, but must have either a pension or some kind of savings plan. Is the return of the Endowment nigh?
On the face of it this seems to be unfair on those who have a legitimate reason for taking out a mortgage on an interest only basis, however when looked at a bit more carefully there are some sound reasons.
Unfortunately many people have used interest only as a way of making sure they can actually afford the mortgage in the first place and deferred worrying about how they are going to pay it back. Is there really anything wrong with a lender insisting, as they always used to a decade or so ago, that they can see a structured plan in place to repay their debt?
Also, is it really right that someone can borrow 90% LTV and say they will pay the loan back by selling in a few years time? This does not happen with smaller personal loans so why with large ones?
For me, whilst I do see where Lloyds are coming from and they are perfectly within their rights to do so I would rather see underwriters employed to make a case-by-case, sensible, judgment rather than a one-size fits all approach.
There are many wealthy individuals for whom interest-only is the correct method and gives them the flexibility they require.
It is a topic that is being discussed within every lending institution and it will be interesting to see if other lenders do follow suit.
For me, something does need to be done to limit the scale of interest only borrowing and borrowers need to be much more aware of how realistically they are going to pay the loan back. Pensions and savings plans are underutilised, as for that matter is life insurance to protect the mortgage that is written into trust.
Too many applicants do tend to ignore brokers advice on these points as they are so focussed on buying the house of their dreams and choose to save money on the very things that can help keep them in the property.
The move by Lloyds shows that lenders are not going to allow the blasé attitude of the past decade to continue and, to be fair, there is a lot of merit in this. However, as with anything, sensible advice and a sensible underwriting policy could give us all the best of both worlds.