Lloyds Banking Group’s move to stop lending on an interest-only basis for mortgages over £500,000 and restrict the range of repayment vehicles it deems acceptable has sparked fears of a market-wide tightening of interest-only lending.
Earlier this month, Lloyds announced that it would no longer accept the sale of a borrower’s main residence, business or an expected inheritance as permissible repayment vehicles.
Lloyds will now only accept endowments, pensions, Isas, share portfolios or a lump sum to repay the remainder of the loan at the end of its term, saying: “It is important that repayment vehicles can provide certainty of their future value.” Lloyds is one of a number of lenders to introduce differential rates for this type of lending, with interest-only rates normally priced a few basis points higher than capital and repayment loans.
There has been some debate over Lloyds’ choice of repayment vehicles but the move is generally understood across the intermediary market. Lenders such as Santander and Northern Rock have already pulled back from lending on an interest-only basis above 75 per cent LTV. This week, Northern Rock reduced the maximum loan to value on interes-only mortgages from 85 to 75 per cent and restricted the repayment vehicles it accepts. It is thought other may follow suit.
The Mortgage Alliance head Phil Whitehouse says it is inevitable that others will follow now that a lender the size of Lloyds has made these changes.
He says: “I think it is inevitable. If you get Lloyds Banking Group, a major force in the UK, taking these sort of steps, it makes every other lender of a similar size review their position.”
A Council of Mortgage Lenders spokeswoman says: “When you see how things have changed over the past few years – things are tighter, lenders are more risk averse – it is entirely possible that it might happen.”
However, Alexander Hall chief operating officer Andy Pratt believes such moves from other lenders will depend on the amount of interest-only lending they have on their books.
He says: “All of them have to look at their own book of business and it will be a question of how much business they have on an interest-only basis. I think it is a move by Lloyds to balance its portfolio. I do not necessarily think it is a bad thing for the broker community, I just think it is something that needs explaining clearly to customers, like any criteria change.”
Pratt also says he fails to understand Lloyds’ changes to the repayment vehicles allowed. “Not allowing sale of property as one of them is something I really do not understand – at certain LTV it is relatively safe.”
But Intermediary Mortgage Lenders Association executive chairman Peter Williams says: “Maybe the view is that the stock market has more of an upward recovery to come, as opposed to the housing market.”
The CML says it will not comment on individual cases but that it is in a customer’s best interests to ensure they have an adequate repayment vehicle in place.
A spokeswoman says: “It is preferable, from a consumer’s point of view, that they are able to pay the capital to the end of the mortgage term, hence the need for a repayment vehicle. Lenders do constantly remind borrowers that they need to review these repayment vehicles to make sure they have the funds at the end of the term.”
Given that Lloyds is taxpayer-backed, some have speculated that the move could stem from political pressure to repay the Government support it received.
Whitehouse says: “I think you cannot escape the fact that there are political implications to this. As a sensible lender that has been propped up by the taxpayer, clearly these are the sorts of policy decisions that will politically help their cause, meaning they will be looked at more favourably as a group.”
Chadney Bulgin director of mortgages Jonathan Clarke agrees that there is pressure to repay the Government but lenders are worried that the housing market is not strong enough for house price appreciation to be relied upon as a repayment strategy.
He says: “With house prices low and expected to be flat for the next two or three years, lenders are worried that they are not going to get their money back. This is especially true for the state-owned banks which have to repay debts.”
Williams adds that the move could be a pre-emptive strike as the FSA has already said it is looking at stricter controls on interest-only lending as part of its mortgage market review.
He says: “I think Lloyds is probably anticipating where the mortgage market review may end up.”
Lloyds Banking Group sales director of mortgages Nigel Stockton says: “I would be surprised if no one else followed suit. Interest-only is a perfectly acceptable way of paying your mortgage as long as you have got an appropriate repayment vehicle. What has changed is its popularity as over a third of the business went to interest-only. From a responsible lender’s view, there is nothing wrong with wanting certainty. It has nothing to do with being owned by the Government.”