Criteria Tightens on Interest Only Deals
July 8th, 2008 by 
Guy
Mortgage Lenders are cracking down on customers who are applying for interest-only mortgages with fewer mortgage applications being approved, analysis from Mform.co.uk showed.
Data from the Council of Mortgage Lenders, which compare January to April 2008 with the same period last year, show that 20,400 interest-only loans for house purchases were approved this year compared to 31,300 in 2007.Mform.co.uk says its own data for remortgages shows that 25.7% of applications through its service were for interest-only loans in the first six months of 2008, compared with 30.4% in 2007.
The online mortgage company warns that lenders are becoming stricter on approving interest-only mortgage applications as lending criteria is tightened, despite the attractions for borrowers of switching to interest-only mortgages to stave off the impact of payment shock.
Switching to interest-only from a fixed rate can save around £2,400 a year in mortgage payments on a £150,000 loan at 7%, mform.co.uk calculates.
The website says that on a repayment basis, monthly payments would be £1,072.63 compared with £875 on an interest-only basis.
Francis Ghiloni, marketing and business development director Mform.co.uk, says: “Lenders are becoming more cautious about interest-only mortgages because of worries about house prices and our experience is that increasingly, borrowers are becoming more cautious too.
“That is not to say that switching to interest-only is necessarily wrong. The worry is when borrowers do not have a method of repaying their loan in place.
“Coming to the end of the mortgage term and not being able to repay the loan would be disastrous.”
He adds: “We would urge anyone contemplating applying for an interest-only mortgage to research the market to find the best possible deals before taking such a step.”
Mform.co.uk’s figures show that 65.7% of applications in 2007 were on a repayment basis with 3.8% of applicants opting for part repayment and part interest-only.
The website’s analysis claims that in the first six months of 2008, 65.6% of applications have been repayment, while 8.6% have been part repayment and part interest-only.
Posted in Mortgage news | 