Interest-only jitters as Lloyds tightens policy

Lloyds Banking Group’s decision to revise the terms of its interest-only deals has sparked concern about the future of interest-only mortgages.

The lender has announced that borrowing over £500,000 will only be available on a repayment basis as part of a strategic review of its interest-only products.

Lloyds group has also decided that interest-only borrowers need to have valid repayment vehicles in place. The sale of a main residence or other assets, including a business, and inheritance will no longer be accepted as proof of repayment.

Lloyds group’s Halifax brand has a maximum loan size of £7.5m, meaning before the the £500,000 interest-only cap was introduced borrowers could theoretically take out loans of up to £7.5m on an interest-only basis.

Nigel Stockton, sales director at mortgages at Lloyds group, says: “Taking a loan of more than £500,000 is a significant commitment.

llowing this amount of borrowing exclusively on a repayment basis is the only way we can guarantee to borrowers and lenders that the capital amount can be repaid at the end of the term.”

Aaron Strutt, broker with Trinity Financial Group, says: “Lloyds group seems to be trying to stamp out interest-only deals. It is certainly making a good job of moving its new borrowers onto repayment deals.”

Other lenders are expected to follow in Lloyds group’s footsteps.

Abbey for Intermediaries reduced its maximum LTV for interest-only deals in 2008 from 85% to 75%.

A spokesman at Abbey’s parent Santander says: “We are comfortable with the measures we have in place for interest-only lending and have no plans to change these.”We will closely track developments in the marketplace and continue reviewing our strategy on an ongoing basis.”

But the Post Office has taken a different stance to Lloyds group on interest-only deals, with a range of 90% LTV deals available on an interest-only and capital and interest basis.