Anyone on an interest-only mortgage must take steps to pay off their debt and not rely on future house prices increases or expected future income to repay the capital owed, says the network.
Martyn Smith, head of mortgage products at Legal & General, says having an interest-only mortgage without a repayment vehicle is like renting the house, except the bank is the landlord.
He says: “I accept that in the long run, the asset will appreciate in value. However, it would be easy to get hooked on an interest-only mortgage and not tackle the real issue, which is of course the debt that is owed.
“Borrowers must wean themselves off interest-only if they are not making the necessary arrangements to repay, such as through an equity ISA. Even if it is overpaying where allowed or switching to a part interest/ part capital repayment mortgage, it is better than not paying off any debt at all.”
Legal & General has been speaking to lenders on this issue over the past few months and it says it is becoming clear that some will be encouraging and incentivising borrowers to move away from interest-only mortgages.
Halifax Intermediaries recently made changes to its range of fixed rate mortgages to favour those on a repayment basis. Some lenders are also tightening their rules on new applications for interest-only, for example insisting on evidence that repayment vehicles are in place, not simply relying on a borrowers undertaking.