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First-Time Buyers Hit By Fresh Lending Drought As Banks Clamp Down On Interest-Only Mortgages

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A new lending drought by banks who hand out 'cheap' mortgages to cash-strapped homeowners and first-time buyers was brewing yesterday.

The dramatic move was triggered by Britain's biggest mortgage lender beginning a major crackdown on interest-only mortgages.

Experts warned tonight that the move by Lloyds Banking Group, owner of Halifax, will prompt copycat changes by its lending rivals.

Interest-only mortgages are hugely popular because they are much cheaper as the homeowner only pays the interest bill every month - but not a penny of the actual loan.

Of the 11.4million mortgages in Britain, about 43 per cent - by value - are interest-only.

For millions of young people, an interest-only mortgage is the only way to get onto the housing ladder at a price they can afford.

But Lloyds, which is 41 per cent owned by the taxpayer, has drastically raised the hurdle for anybody wanting to get an interest-only loan.

For the first time, it is introducing a cap which means it will refuse to hand out an interest-only mortgage for more than £500,000.

A new charging structure also means that anybody who wants an interest-only deal will be charged a rate which is 0.2 percentage points higher than a repayment deal.

Thirdly - and possibly most significantly - it has changed the types of 'repayment vehicles' which it will accept.

With an interest-only mortgage, a borrower has to explain how they will pay back the capital of the loan.

Lloyds said that it will no longer accept some of the most common explanations - to sell the property, to sell a business or to come into an inheritance.

Melanie Bien, director of the broker Savills Private Finance, said she believes that interest-only mortgages may eventually disappear.

She warned: 'The days of the interest-only mortgage are numbered. Lenders see them as being extremely risky, and they would much prefer everybody to have a repayment deal.

'There will be fewer and fewer of them, and they could eventually disappear.'

Within hours of Lloyds's announcement, another top lender, Nationwide, said that it is reviewing its interest-only mortgage offer.

Other lending giants have already decided to take a much more cautious approach.

Santander, owner of Abbey and Alliance & Leicester, has cut its maximum loan size for interest-only deals to 75 per cent of the value of a property. It used to be 85 per cent.

Homeowners who can afford a repayment mortgage are given a more generous deal, and are able to borrow 90 per cent of the property's value.

A spokesman for Santander said yesterday it will 'closely track developments in the marketplace and continue reviewing our strategy on an ongoing basis.'

One of the biggest worries surrounding interest-only mortgage deals is that people can take them out without any real plan as to how they will pay back the loan.

For example, many people use the 'granny excuse' which is that they expect to inherit money from their grandparents or other elderly relatives.

In practice, they do not inherit a penny from their grandparents, or receive less than they expected or their granny lives longer than expected.

David Hollingworth, from the mortgage brokers London & Country, said lenders are all taking a close and cautious look at their interest-only deals.

He said: 'The move by Lloyds is the start of a trend.

'When the biggest lender makes this kind of move, it just signals that that is where the market is going.

'For millions of people it should be a wake-up call. How exactly are you going to repay your mortgage?'

The domino effect of the mortgage market, whereby lenders quickly copy each other, is well-documented.

In 2008, they rapidly axed 100 per cent mortgages deals within weeks, and started demanding that everybody put down a deposit of at least five per cent.

Yesterday Lloyds commercial director Stephen Noakes said: 'As interest-only has become a more popular choice, it is the right time to review our approach to interest-only.

'These changes ensure that our products and processes reflect the additional risk of this type of lending both to our customers and ourselves.'

The temptation to take out an interest-only mortgage is the huge saving. On a 25-year £150,000 mortgage at four per cent, the monthly payments would be £500, or £792 with a repayment deal.

Mr Hollingworth said: 'Many people take out an interest-only deal and promise themselves that they will switch to repayment after two years.

'But two years pass, and they still cannot afford to switch and they stay on interest-only.'

After a decade on interest-only, the cost of switching to a repayment deal means the monthly cost would jump to £1,109 for the remaining 15 years of the deal.

Edited by AskFrank

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"For the first time, it is introducing a cap which means it will refuse to hand out an interest-only mortgage for more than £500,000."

That's just daft.

1) The problem with the housing market, in my opinion, is mostly towards the lower end

2) For people borrowing 500k+ an IO mortgage can be quite useful as many will be on significant salaries and it's quite a useful facility in the context of other investments/commitments

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"With an interest-only mortgage, a borrower has to explain how they will pay back the capital of the loan.

Lloyds said that it will no longer accept some of the most common explanations - to sell the property, to sell a business or to come into an inheritance."

I think this is the significant part. They can now really squeeze the number of IO mortgages and, as stated, phase them out. Good news for reducing house prices.

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It´s up to 43% of mortgage lending now. Crikey, That´s a shocking figure.

Small wonder house prices have inflated to such dizzying heights if people have been given the tools to buy something they simply can´t afford to actually pay for.

Edited by CrashedOutAndBurned

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It´s up to 43% of mortgage lending now. Crikey, That´s a shocking figure.

Small wonder house prices have inflated to such dizzying heights if people have been given the tools to buy something they simply can´t afford to actually pay for.

And that is buy value. I would guess that interest only is something that is more often taken by the young / poor who inhabit smaller houses. therefore the quantity of houses under interest only is probably much higher than that

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And that is buy value. I would guess that interest only is something that is more often taken by the young / poor who inhabit smaller houses. therefore the quantity of houses under interest only is probably much higher than that

buy value? :blink:

I should think the opposite: lots of people whose mortgages date back 10 years or more to a time of cheap houses are on repayment deals with £20k left to pay, whereas bubble-buyers from 5 years ago had to go interest-only to get £200k.

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I would guess that interest only is something that is more often taken by the young / poor who inhabit smaller houses. therefore the quantity of houses under interest only is probably much higher than that

Three letters for you: BTL. Get an IO mortgage on a BTL house. The rent pays the interest while you wait for house prices to rise 10%. Then MEW the "equity", and use this as a deposit for another IO mortgage on another BTL house. Wait for a bit more HPI, then MEW again and buy two more BTL houses on IO mortgages. Repeat to buy another 4, then another 8, etc. The pyramid gets bigger and bigger until one day you are able to quit your job as a maths teacher and spend the rest of your days shopping for coach driver jackets.

Of course this is a Ponzi scheme where the mortgage lenders are ultimately the patsy. It fails on cashflow terms when interest rates rise, or it might get killed if there is some HPC and the mortgage lenders make a margin call (i.e. demand more deposit money to bring the LTV back down).

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It seems The Daily Mail are incredibly biased with what comments they choose to publish! Any mention of a house price crash and they won't even publish it.

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It seems The Daily Mail are incredibly biased with what comments they choose to publish! Any mention of a house price crash and they won't even publish it.

Mine has not been published yet. Posted at about 8am. Although they do normally post my

uber bearish comments.

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buy value? :blink:

I should think the opposite: lots of people whose mortgages date back 10 years or more to a time of cheap houses are on repayment deals with £20k left to pay, whereas bubble-buyers from 5 years ago had to go interest-only to get £200k.

just pure speculated but from people I see it tends to be the rich boomers in nice big 1/2 million pound houses who have repayment mortgages. As you say younger folkk who have bought more recently had to go interest only to 'get on the ladder'. They also had to buy cheaper new-builds or flats at around 200K. so buy value it takes 2 interest only's to make one repayment.

I take your point though and as I say it was just speculation.

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It´s up to 43% of mortgage lending now. Crikey, That´s a shocking figure.

Yes I had to double-take that. It's astonishing.

Our housing market is basically built on sand.

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43% of value is mad.

How long have I/O been been so popular? 8 years? accounting for around 50% of mortgages taken out at peak?

Be interesting to see the % value of loans (I/O vs repayment) made as I/O grew.

What % of all mortgages are I/O???????????? I'm kinda expecting it to be less than 43%

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Yep quick sand!

Do you think Jesus missed out the word market by mistake when he said

'a foolish man who built his house (ing market) on the sand: and the rain descended, the floods came, and the wind blew and beat on that house (ing market) and it fell. And great was its fall' Matt 7:26-27 (slightly adapted)

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43% of value is mad.

How long have I/O been been so popular? 8 years? accounting for around 50% of mortgages taken out at peak?

Be interesting to see the % value of loans (I/O vs repayment) made as I/O grew.

What % of all mortgages are I/O???????????? I'm kinda expecting it to be less than 43%

Remember that as house prices go up, newer mortgages by definition are bigger than older; indeed, this is true even with no HPI, assuming most mortgages are repayment. So a few years of big I/O mortgages ends up being a huge chunk of the mortgage book.

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It´s up to 43% of mortgage lending now. Crikey, That´s a shocking figure.

Small wonder house prices have inflated to such dizzying heights if people have been given the tools to buy something they simply can´t afford to actually pay for.

Just amazing just under one in two mortgaged 'HOME_OWERS' is just renting off the banks!

Just imagine how many have mewed too for their new cars/holidays/home extensions etc.

(they are now also going to be a target & hit with higher council taxes)

No wonder Gordon/the banks have been bending every rule to keep house prices up for years.

Edited by erranta

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Do you think Jesus missed out the word market by mistake when he said

'a foolish man who built his house (ing market) on the sand: and the rain descended, the floods came, and the wind blew and beat on that house (ing market) and it fell. And great was its fall' Matt 7:26-27 (slightly adapted)

What have you read recently about "SandBanks" Dorset housing?

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Three letters for you: BTL. Get an IO mortgage on a BTL house. The rent pays the interest while you wait for house prices to rise 10%. Then MEW the "equity", and use this as a deposit for another IO mortgage on another BTL house. Wait for a bit more HPI, then MEW again and buy two more BTL houses on IO mortgages. Repeat to buy another 4, then another 8, etc. The pyramid gets bigger and bigger until one day you are able to quit your job as a maths teacher and spend the rest of your days shopping for coach driver jackets.

Except since they are IO mortgages and you keep leveraging up, you NEVER have any equity and NEVER pay out the principle.

You have you world biggest buy-to-let empire until day 9,130. Then you are bankrupt.

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  • 259 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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