Time for a rethink on repayment deals

AARON STRUTT, PRODUCT AND COMMUNICATIONS DIRECTOR, TRINITY FINANCIAL GROUP
AARON STRUTT, PRODUCT AND COMMUNICATIONS DIRECTOR, TRINITY FINANCIAL GROUP

Coventry Building Society is the latest lender to change its interest-only policy and it’s not making life easy for anyone.

Coventry had one of the best models for higher LTV mortgages. It allowed a maximum 85% LTV on products, of which 75% could be on an interest-only basis and 10% capital repayment. This seemed like a good way to do things.

To make all first-time buyers take out a repayment mortgage seems drastic. The Post Office lets borrowers to take a 90% LTV deal on an interest-only basis if they have a repayment vehicle in place.

There are benefits to having a full repayment mortgage and with interest rates so low the repayment option is affordable for many, but problems will arise when the Bank of England base rate goes up.

One deal I wouldn’t want to be on if the base rate rises any time soon is Cheltenham & Gloucester’s first-time buyer deal.

The initial tracker rate is as low as 0.49% until the end of February 2011 but it then shoots up to 5.69% over base until the end of September 2012. A £200,000 capital repayment deal at 6.19% costs £1,311 a month for 25 years. If the base rate rises payments could become unaffordable.

Halifax says it will be checking up on clients who have taken out an interest-only mortgage, writing to them every year to ensure they are on target to repay their mortgage.

Lenders should look at inventive ways to make repayment mortgages more affordable rather than make things harder for everyone.