The end of interest only borrowing ?

Interest-only mortgages are set to disappear as a major high street bank restricts access to home owners.

Santander has become the first major high street bank to insist that home owners need a 50pc deposit – or 50pc equity in their home – if they want an interest-only mortgage.

This move not only affects those buying a property, but will also hit existing borrowers who are moving home. If their current home loan breaches these new rules they will have either to switch to a repayment mortgage or to pay off a significant slice of their debt.

 Before the credit crunch interest-only mortgage deals were particularly popular with first-time buyers looking to get a foothold in the housing market, as the monthly repayments were lower when compared with borrowing the same amount on a repayment basis. This enabled some buyers to effectively borrow more.

 Since then, most lenders will allow homebuyers to borrow only up to 75pc of the property value on an interest-only basis.

This is a significant move, and we are likely to see other lenders tightening their criteria. This move will no doubt force others to review their policy.

This won't just hit the more reckless borrower, who doesn't have any repayment plan and is simply banking on house price inflation to enable him to pay off this debt. It will also hit those who have taken a more informed decision and have a repayment plan in place.

 Mark Harris, the chief executive of SPF Private Clients, said: "This sets a precedent. There is a danger that other lenders might follow suit, leading to the end of interest-only borrowing as a realistic option for the majority of borrowers. Yet interest-only borrowing is not necessarily reckless, as long as the borrower has a repayment strategy in place."

Other high street banks have become far stricter on what they consider to be an acceptable repayment vehicle. Relying on a future inheritance, pay rise or an increase in house prices is often not deemed suitable. Even investment plans, such as equity Isas, may not be considered satisfactory.

Barclays, for example, will consider equity Isas, but its calculations assume there is zero growth on the plan. In addition customers have to have been contributing for 12 months before taking out the mortgage.

As always , thanks for your attention.

Mark ( mark@themortgagemonkey.co.uk)