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£50,000 rule for RBS interest-only mortgage deal


New interest-only mortgages taken out by Royal Bank of Scotland (RBS) and NatWest customers will be restricted to people earning at least £50,000 under fresh rules announced today.

The new requirements will help deal with market volatility and are part of RBS and its sister brand NatWest showing "responsible" lending by ensuring the mortgage is affordable to the consumer, the Royal Bank of Scotland group said.

The announcement follows general concerns of an interest-only mortgage "ticking time bomb" across the market, with worries previously raised that some borrowers currently on interest-only deals with lenders may find themselves unable to remortgage.

The group said the new rules are "in line" with recent changes across its competitors and it will retain the current loan-to-value (LTV) mortgage lending rate of 75%. The criteria changes only apply to residential mortgages and not to existing interest-only mortgages.

The changes mean that interest-only mortgages will only be available to RBS/NatWest customers who have banked with them for three months prior to application and payed in more than £1,000 salary per month into their current account.

Interest-only mortgages will only be available to customers who earn a minimum of £50,000 gross basic salary a year, before any regular overtime or bonus income is taken into account.

When there are joint applications, the main applicant must earn at least £50,000 basic salary gross and it is not enough for both applicants to be earning at least this amount combined.

The Bank of England expects lenders to tighten their borrowing criteria this year. Lenders have recently made a wave of recent mortgage rise announcements, affecting more than a million borrowers in total, blaming higher funding costs and the weak economy.

The property price boom fuelled a surge in interest-only mortgages, peaking at a third of all mortgage sales in 2007.

Taking such mortgages out was a way for consumers to increase their borrowing capacity at a time when property prices were outpacing wage increases.

More recently, sales of such products have accounted for less than 20% of mortgage sales as the subdued property market means lenders can no longer be certain that consumers will be able to remortgage elsewhere before the end of the mortgage term.

Earlier this month, the Financial Services Authority (FSA) warned that some borrowers aged in their late 50s who are currently on interest-only deals face a "ticking time bomb" whereby they could be unable to remortgage.

An estimated £120 billion of interest-only mortgage loans generally which have already been taken out are due for repayment over the next 10 years, presenting a "significant challenge" for lenders and consumers, the FSA estimated in its Mortgage Market Review published last year.

Under the FSA's plans to tighten up on irresponsible lending generally, interest-only mortgages will only be offered in future where there is a credible plan to repay the capital, and borrowers cannot just rely on hopes that house prices will rise.

Martin Wheatley, managing director of the FSA's conduct business unit, told the House of Commons' Treasury select committee that regulation could not solve all the problems created over the last 20 years.

Mr Wheatley said: "There is a ticking time bomb that's been created over the last 20 years and what we're trying to do is to make sure that that ticking time bomb does not get any worse from here on in."

The FSA has said its calculations showed that some 1.5 million interest-only mortgages worth around £120 billion will be due for repayment in the next decade.

The Council of Mortgage Lenders (CML) has been working with its members to identify ways of helping interest-only borrowers without sufficient means to repay the capital by the end of the term.