Do interest-only restrictions create North-South divide?

Ever since interest-only lending came under the spotlight in the Financial Services Authority’s Mortgage Market Review consultation papers, lenders have been making changes to their interest-only criteria.

But while policies such as having a lower LTV threshold for interest-only mortgages seem sensible, Mortgage Strategy was surprised to learn this week that certain existing borrowers are banned from making even a temporary move onto interest-only repayments – because their house isn’t worth enough money.

Mortgage Strategy was contacted by one Nationwide borrower on a capital repayment mortgage who wished to make a temporary switch to interest only in order to carry out some repairs on his home.

But he was told by the lender that he could only do so if he had an LTV of 66% or lower and at least £150,000 of equity in the property.

The borrower satisfied the first criteria but failed on the second – because his Lancashire home is worth less than £150,000.

According to the latest available Land Registry house price data for July 2011, the average house price in Lancashire is just £111,760, meaning the borrower is unlikely to be alone in his dilemma.

In fact, Nationwide’s £150,000 threshold policy appears to create a distinct North-South divide, effectively excluding the majority of borrowers in the North from transferring to interest only.

Land Registry data shows that all northern regions fall comfortably below the threshold – the average house price is £101,143 in the North-East, £114,452 in the North-West and £122,083 in Yorkshire and Humber – while all southern regions are significantly above it, with average prices in the South-East being £209,309, prices in the South-West being £174,946 and in London £346,416.

A spokesman for Nationwide says: “For those who wish to move from a repayment to an interest-only mortgage, it is right we ensure they have sufficient equity in their property – they must have £150,000 of equity in their home and the LTV must be no more than 66%.”

Ray Boulger, senior technical manager at John Charcol, says the policy is odd but Nationwide is not alone in exercising such restrictions and it could be that the move is being driven by the FSA.

“Many of the larger lenders have a similar policy which is why many brokers are turning to the smaller lenders instead,” he says.

While it may be prudent to put restrictions on interest-only, one would have thought that lenders would have enough common sense not to ask borrowers to meet impossible criteria.