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Interest-only over £500,000 to go as part of Lloyds review

Lloyds Banking Group is no longer offering borrowers an interest-only repayment method if they are borrowing more than £500,000 as part of wider changes it is making to its interest only proposition.

The lender is also requesting that borrowers offer some proof of a repayment method.

But it will no longer accept a sale of the house or business, or inheritance as acceptable.

Instead it wants borrowers to have a suitable repayment vehicle in place, for example a pension or insurance policy.

Nigel Stockton, sales director of mortgages at Lloyds Banking Group, says: “Interest-only has significantly grown in popularity. That does not mean that it’s a greater risk but means it’s the right time to review it. We have to be sure that our products reflect the additional responsibility of having an interest-only mortgage both to borrowers and us.”

Stockton adds that the group has had little experience of borrowers defaulting on interest-only mortgages but there is still a risk there that repayments will not be met.

He adds: “Taking a loan above £500,000 is a significant commitment, and it stands to reason that any potential shortfall would be a substantial amount.

“Allowing this amount of borrowing exclusively on a repayment basis is the only way that we can provide the protection both to the borrower and the lender that the capital amount can be repaid at the end of the term.”

The new measures will come in place today for brokers and in branches next week.

The lender will also be writing to existing interest-only customers in the coming weeks to encourage them to review their repayment model.

Halifax for Intermediaries hiked its rates on its tracker and fixed rate mortgages for interest-only payments earlier in the year.

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  • Andy Valvona 18th May 2010 at 10:52 am

    Dont’ panic!!!!! I think the scenario of £500k on £2m, would be approved as an exception. What we must remember here is that Lloyds have amended their general criteria, which will almost certainly be subject to negotiation on certain cases, such as the example quoted. They will continue to write the odd case which is outside criteria – they always have done so, and always will.

  • Responsible Lending 13th May 2010 at 12:25 pm

    Scenario – Middle aged couple take out an interest only mortgage over 25 years to take to retirement age stating that sale of property as their way of repaying the capital upon maturity.

    Upon maturity they refuse to sell the property as there is not sufficient equity to keep up their current standard of living. Should the lender re-possess as the applicants are in breach of their mortgage?

    There are two sides to every story and lenders are seeing more and more customers refusing to sell their properties at term having been sold interest only mortgages with no investment vehicle other than the property. Help is limited as the customers are usually nearing retirement age and cannot afford a repayment mortgage to clear their mortgage debt on pension income, but refuse point blank to sell their property.

    Well done LloydsTSB for being first, and I expect all the major lenders to quickly follow.

  • Paul SIlcox 13th May 2010 at 10:24 am

    “I have a client with an interest only mortgage of 1.6 million. Property value is 2.7 million….where is the problem???”

    House prices crashing by 50% would be a problem, no? Don’t think that it can’t happen. Gov is out of money and out of bullets to prop up the housing ponzi scheme.

  • Ancient Wisdom 12th May 2010 at 6:35 pm

    I can understand wanting repayment for LTV above 85% but what if it was at 50% LTV or below?

    Perhaps they will offer BBR + 0.5% or 1% to entice new borrowers?

    Another reason to stop using Lloyds TSB – not that we have ever used them in the last 3 yrs anyhow! (and they are one of the worst offending ‘dual pricers’ in the market place).

  • Not rocket science, honest! 12th May 2010 at 5:44 pm

    Granting interest only should be governed, if indeed it needs to be, by LTV not by amount. how can it be OK at £475k and not OK at £525k? Complete nonsense.

    If there needs to be a policy to placate the regulator then have a cut off at say 60%/65%. Indeed,the LTV could increase further as the loan amount reduces if there is a fear of Jumbo loans? It is not rocket science and the risks are balanced all round.

  • Daniel Brown 12th May 2010 at 4:37 pm

    Seems a pretty reasonable plan to me, £500K is alot of money, i would want to be pretty damn sure I got it all back in the end too.

  • compliance man 12th May 2010 at 4:33 pm

    Agree with anonymous at 3.53

    Also, ‘where the problem is’ is the still typical assumption some people want to make that property values will stay as they are or rise and that the borrower will not default. Interest only is a higher risk lending proposition and needs to be recognised as such.There is also the often ignored fact that many people do not want to downsize when it comes to it.

    Anyone who has read the FSA and OFT’s views on ‘irresponsible’ lending should know that lending on asset value regardless of ability to repay the loan is not acceptable.

    The higher the amount that would still be owed at expiry of the loan the greater the risk so the move seems quite sensible.

  • CARLOS BOFILL 12th May 2010 at 4:14 pm

    ME PARECE UNA LOCURA TODO ESTO …..

  • CARLOS BOFILL 12th May 2010 at 4:13 pm

    ME PARECE UNA LOCURA TODO ESTO…..

  • Anon 12th May 2010 at 3:53 pm

    Some people really have no idea. To the person who said if they can’t afford a repayment mortgage – you shouldn’t be taking out an interest-only mortgage anyway! This option has always been designed for those with separate repayment vehicles. This is just responsible lending.

  • john higgins 12th May 2010 at 3:52 pm

    further proof that Stockton & the Lloyds group have completely lost the plot. Surely interest only is aimed at financially astute clients that have ‘other’ forms of investment to repay the loan at the end of the term. The majority of high net worths have a mortgage greater than £500k so the people the product is aimed at are now being excluded. Great work Stockton & Lloyds!!

  • john higgins 12th May 2010 at 3:51 pm

    further proof that Stockton & the Lloyds group have completely lost the plot. Surely interest only is aimed at financially astute clients that have ‘other’ forms of investment to repay the loan at the end of the term. The majority of high net worths have a mortgage greater than £500k so the people the product is aimed at are now being excluded. Great work Stockton & Lloyds!!

  • Tony Barlow 12th May 2010 at 3:47 pm

    What an absolute utter nonsense.
    So does Lloyds want to be notified when the client cashes their ISA?!

  • Paul 12th May 2010 at 3:41 pm

    Scenario – Middle aged couple with 4 kids. Sell current property and have 1.5 million cash. Want a new property for 2 million. 500k interst only mortage, all affordable and passes usual checks. No intention of remaining for ever as will sell when children leave home and downsize. Where is the bad risk in this? Lenders need to get a grip. Another example of automated decisioning gone mad. Absolute madness.

  • Jay 12th May 2010 at 3:18 pm

    So, if you cant afford a repayment mortgage you had better get yourself down the local letting agency. How rediculous!

    I have a client with an interest only mortgage of 1.6 million. Property value is 2.7 million….where is the problem???