Mortgage hunters to find lenders are making life harder
Savvy Money: The way banks and building societies interpret new rules for home loans may cause problems
Saturday 26 April 2014
Saturday was a big day for the mortgage industry - and for anyone who wants to buy a property or remortgage in the future.
Lenders will have to abide by new rules which mean they must make sure that someone can afford the mortgage they want to take out. They'll also have to give advice, in most cases.
Banks and building societies will still be able to let people take out interest-only mortgages - although some have already decided they don't want to. However, they'll have to make sure there's a "credible strategy for repayment" - i.e. that the borrower has a way of paying the loan off.
Very few people are taking out new interest-only mortgages to buy a property, but last year figures from the regulator, the Financial Conduct Authority (FCA), showed around 2.6 million people already have them.
The FCA has said that mortgage lenders can make use of what are called "transitional rules" if a customer doesn't want to increase the size of their mortgage. These rules will mean that lenders can let customers remortgage without necessarily fulfilling the FCA's criteria for having a credible repayment strategy in place.
You might be scratching your head thinking "why would a lender not want someone to have a repayment strategy in place?". It's a fair question. The problem isn't so much with the theory, rather it's with the way some lenders are interpreting the rules. And, if you want to borrow more, you won't be protected by these transitional rules anyway.
For example, if you have an endowment, it's likely that your lender will take future payments that you make and projected growth (based on growth rates set out by the regulator) into account when working out how much you can borrow on an interest-only basis.
So if, for example, your endowment is currently worth £100,000, but it should be worth £135,000 by the time it matures and your mortgage term ends, you should be able to borrow £135,000, as long as you meet the lender's other criteria. Lloyds Banking Group, Santander and Co-operative Bank are among those that take this approach.
However, if you're relying on something like a stocks-and-shares Isa to pay back your interest-only mortgage, your lender may only take its current value into account - even if you're committed to putting money into it every month until your mortgage is paid off. Yorkshire Building Society and Santander are two that assess current value only.
In some cases lenders are even stricter. Not only will they ignore future growth and contributions, they'll only lend on a percentage of your investment's current value.
For example, Lloyds Banking Group will only take up to 80 per cent of the current value of an investment like a unit trust, shares or a stocks-and-shares Isa into account, and it must be worth a minimum of £50,000. So, if you want an interest-only mortgage of £100,000, you'd need investments worth £125,000 at the time you apply in order to be accepted.
HSBC takes the same approach with stocks-and-shares Isas. Barclays (which provides mortgages under the Woolwich brand) is one of the few that says it takes both future growth and future payments into account.
Ray Boulger, of mortgage brokers John Charcol, says that lenders are "running scared" of the FCA and that their rules aren't logical.
A number of lenders won't let you use cash savings, premium bonds or cash Isas to pay off your mortgage, or - in some cases - buy-to-let property. Mr Boulger wonders how they will cope with the new Isa rules in July which will mean money can be transferred from a cash to a stocks-and-shares Isa, and vice versa.
I can't work out why a lender would only take a percentage of an investment's value into account or why it wouldn't use the FCA's growth rates when assessing how someone will repay their interest-only loan.
Lenders - and borrowers - need to be responsible, but this inconsistent approach doesn't seem to sit well with "treating customers fairly".
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