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Northern Rock draws line under interest-only loans

Northern Rock is the latest lender to clamp down on interest-only lending, with others expected to follow suit.

It has reduced the maximum loan to value for interest-only mortgages from 85 to 75 per cent and restricted the repayment vehicles it accepts.

This follows similar moves by Lloyds Banking Group, Santander, Woolwich and Coventry Building Society and comes after the FSA proposed tighter controls over interest-only affordability checking in its mortgage market review.

Northern Rock says it will no longer accept inheritance, dividends, regular overpayment, bonuses or the intention to convert to repayment at a future date as repayment strategies. It will not accept the sale of property as repayment for loans of more than 60 per cent LTV or where the borrower has less than £150,000 equity in the property.

Earlier this month, Lloyds capped the amount that can be borrowed on an interest-only basis at £500,000 and will no longer permit the sale of a main residence, business or inheritance as a repayment option. Santander no longer lends on an interest-only basis above 75 per cent LTV.

A Northern Rock spokesman says: “We have got to consider affordability and ensure customers have a suitable vehicle to repay the loan.”

Grant Pollock, a financial planner at Johnston Financial, says he thinks banks will continue to tighten their policies and that he agrees with this in the interest of affordability.

He says: “There will always be certain situations where I would like to see lenders sit down and look at individual cases. But in the past, people have borrowed money on an interest-only basis just to make it more affordable without having an easy payment vehicle in place and that is not a good position to be in.”

The Mortgage Alliance head Phil Whitehouse says it is inevitable that other companies will follow now that lenders such as these have tightened policy. He says: “It is inevitable. It makes every other lender of a similar size review its position.”

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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Julian Stevens 28th July 2010 at 9:33 am

    But why wasn’t the FSA proposing such measures as long ago as 2005 when many commentators were already warning that house prices were spiralling unsustainably out of control, fuelled in large measure by reckless lending practices?

    Just about everything the FSA does seems to be a matter of trying to catch up after all the brown stuff’s hit the fan. A few fines and bans here and there, followed by Margaret Cole trumpeting to the world what a great job the FSA’s doing ~ but it’s all too late.

    Okay, it would be unreasonable to expect the FSA to have crystal balls about what the future may hold, but when all the warning signs were flashing so very brightly and urgently, you’d think they’d have been prepared to take on board what many well informed people were surely trying to tell them. Hell, just for once, one of those hugely expensive outside market analyses that the FSA loves to commission might actually have been worth it. But no ~ probably the RDR seemed like a much more interesting “new regulatory initiative” and never mind that two or three wheels were about to come off the mortgage bandwagon.

    If only the FSA would listen to what people out here in the real world are trying to tell it, then UK plc wouldn’t be in its current mess.

  2. Shannon Le Roux 29th July 2010 at 8:31 am

    I think that it is absolutely terrible that Northern Rock did not give us an option when the bank split and now it is time for us to remortgage and we do not have any options with them but to go on the variable rate which we do not like as we like to fix our mortgage and we have just bought our property so there is not alot of equity as of yet. I think it is disgusting and that we should get an option to fix our mortgage.

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