Interest-only mortgage house arrest

Moneyfacts is warning brokers to alert their clients about the sudden surge in lenders reducing the LTVs on interest-only mortgages to just 50%, placing them firmly out of the reach of the majority of borrowers.

Lenders cite this as “prudent” borrowing but anyone who currently has an interest-only mortgage at a higher LTV than 50% needs to consider their limited options quickly, Moneyfacts said.

The latest changes to interest-only mortgages have seen Abbey, Leeds and Coventry cut LTVs from 75% to 50%, Nationwide cut from 66% to 50%, Newbury cut from 75% to 70%, Skipton from 75% to 60%, Manchester cut from 70% to 60%, Teachers Building Society cut from 70% to 50% and HSBC cut from 80% to 75%.

Sylvia Waycot, spokeswoman at Moneyfacts.co.uk, said: “Problems may arise if clients need to borrow additional money for home improvements, such as building extra bedrooms etc because this will be deemed a new loan.”

Clients in this situation will only be able to borrow around 50% of the house value, which in most cases will be less than the original mortgage.

Waycot added: “The end result is that many people who chose an interest-only mortgage because it was cheaper and are at their maximum monthly outgoings will find themselves unable to move should they need to - they are in fact under a form of house arrest.”