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Borrowers caught in a trap

Mortgage advisers are warning that tighter interest-only criteria will trap hundreds of thousands of borrowers and leave them unable to remortgage.

This week, Nationwide Building Society cut its maximum loan-to-value ratio for interest-only lending from 75 per cent to 50 per cent.

Santander cut its interest-only LTV from 75 per cent to 50 per cent last month. It allows clients to switch to a different product as long as they were looking to borrow the same amount and it is under the old 75 per cent cap.

Existing borrowers will be able to switch to another Nationwide mortgage or port their mortgage without being hit by the new rules, unless they want to increase their borrowing. Pipeline cases submitted by March 21 will be considered under the old criteria.

Woolwich, Clydesdale Bank and Lloyds Banking Group have all made changes to their interest-only criteria in recent weeks.

Woolwich has ruled out any immediate plans to cut its maximum LTV to 50 per cent while Northern Rock says it will monitor any increase in interest-only business it receives as a result of its competitors’ decisions.

Royal Bank of Scotland and Halifax were unavailable for comment on the issue.

In its final MMR consultation paper, published in December, the FSA proposed that lenders assess affordability for interest-only loans on a capital and interest basis unless the borrower has a “believable” way to repay the mortgage.

It says it will make some transitional arrangements to allow lenders to bypass the new rules which will allow some customers to remortgage.

Association of Mortgage Intermediaries director Robert Sinclair says: “Until the FSA comes out with its transitional arrangements, there will be problems for people who cannot meet affordability requirements and therefore cannot remortgage and will be trapped.”

London & Country associate director of communications David Hollingworth says: “This will be the end of interest-only for many borrowers and it will go back to being a niche product. Hundreds of thousands, maybe millions, will find their options severely limited and will be unable to remortgage.”

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