UK Interest-only mortgage house arrest

By: MoneyFacts

There has been a 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.

Sylvia Waycot, spokesperson for Moneyfacts.co.uk, said: “Don’t worry if you already have an interest-only mortgage at a higher loan-to-value than is now offered. The change applies to new borrowers only.  

“However, problems may arise if you need to borrow additional money for home improvements, such as building extra bedrooms, etc., because this will be deemed a new loan and you will only be able to borrow around 50% of the house value, which in most cases will be less than the original mortgage.     

“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, or borrow for improvements – which means they are in fact under a form of house arrest 

“If you have a relatively new interest-only mortgage (less than five years old) you could consider moving to a repayment mortgage while you still have the majority of years left to pay off the loan before retirement. But don’t take too long considering this as the later the move is made the more costly the monthly expense will be as the timescale for clearing the debt will have reduced.”

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