NatWest and RBS to withdraw from interest-only mortgage market

ReenaSewraz
by Lovemoney Staff ReenaSewraz on 27 November 2012  |  Comments 3 comments

NatWest and RBS will no longer offer new residential interest-only mortgages to buyers from Monday.

NatWest and RBS to withdraw from interest-only mortgage market

NatWest and Royal Bank of Scotland (RBS) are the latest lenders to pull out of the interest-only mortgage market. From Monday 3rd December they will no longer offer this type of mortgage to residential buyers.

Buy-to-let mortgages will still be available on an interest-only basis and existing borrowers set up on this arrangement will not be affected by the change.

But this move is the latest sign that the interest-only mortgage market is closing up, leaving existing borrowers limited choices if they need to remortgage.

Narrowing options

Over the past year lenders have either toughened up their criteria or dropped out of the interest-only mortgage market entirely.

In February Santander announced it would only lend on an interest-only basis on up to 50% of the property’s value. And around the same time Lloyds said it would no longer accept cash savings, like Cash ISAs, as a repayment method.

Derbyshire, Cheshire, Yorkshire, Dunfermline and Coventry Building Societies have also adjusted criteria on these sorts of loans.

In October RBS decided to only offer interest-only on an advised basis rather than in a branch or over the telephone.

But now the lender, along with its NatWest brand, joins Nationwide  and the Co-operative on the growing list of lenders that are withdrawing from the market entirely.  

The changes are a reaction to the recession and credit crunch. Although they may protect new buyers, it leaves those who have taken out an interest-only mortgage with limited options.

The worry is that those already with an interest-only mortgage will become prisoners unable to move onto a new deal when rates rise.

The problem with interest-only

Interest-only mortgages are much higher risk than repayment loans.

The method of borrowing allows a buyer to get a home loan and only pay off the interest each month instead of a mix of capital and interest.

This means lower monthly repayments, but only works if buyers have a plan in place to pay off the amount borrowed in one lump sum when the mortgage term ends.

Pre-credit crunch this sort of mortgage was approved without much thought going into how this debt might be paid off by the borrower.

The result according to recent research from data company Xit2 is that there are £160 billion-worth of interest-only mortgages due to mature in the next eight years that have no repayment plan in place.

The Financial Services Authority is currently reviewing interest-only mortgages, and will publish its findings in 2013, but it has already stated that the responsibility of repaying the loan rests solely with the borrower and not the lender.

What to do

If you have an interest-only mortgage and are worried about how to repay it or about the narrowing options available to you, act now. Read: Your options if you're struggling to pay off your interest-only mortgage for some ideas on what you can do.

More on mortgages:

Offset mortgages won't save you money

Buy a property without a deposit

The top 10 shared ownership mortgages

Metro Bank, Virgin Money, Tesco Bank: are their mortgages any good?

Skipton launches market leading ten-year fixed rate mortgage

 

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Comments (3)

  • Aitken B
    Love rating 146
    Aitken B said

    It lowers risk for the bank.

    So - after gambling away their business then blackmailing the tax payer via HMG into bailing them out so they can continue to "earn" their outrageous bonuses they look for ways to ensure they keep even more of our money presumably so they can further enhance their outrageous bonuses.

    When Stephen Hester became CEO of RBS after our loveable Fred was paid a huge amount of money to go away, he was challenged on the size of his remuneration package. His response was "I'll only get that if the share price goes up". Sounds impressive EH? but I should think it difficult indeed to find anyone at the time and given that the Bank was being bankrolled by us, the tax-payers, who thought the share price could go any other way but up.

    Should have been a politician Stephen, you're a natural.

    Report on 28 November 2012  |  Love thisLove  0 loves
  • laska
    Love rating 1
    laska said

    Part of my mortgage is interest only - which was the only way for me aged 50 to be able to buy a modest London flat after a divorce. It's not a huge amount and I'm not overly worried about paying it off when the time comes. Of more concern to me is that in the 5 years since the value of my property has, like many others, dropped.

    It seems strange to me that mortgage lenders are happy to lend on a repayment basis at a time when property prices are remaining seemingly stagnant for the foreseeable future, but will not "gamble" on someone who can show they have the ability to save or will inherit etc, thus being in a position to pay off the interest-only amount

    Report on 28 November 2012  |  Love thisLove  0 loves

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