Nationwide re-enters interest-only mortgage market
With an interest-only mortgage, the borrower pays only the interest on the loan each month and the capital is paid back after the mortgage term ends.
Nationwide will offer interest-only products through mortgage intermediaries up to a maximum loan to value of 60 per cent.
Borrowers must have minimum equity of £300,000 if they live in London, £250,000 in the South East and £200,000 for those living elsewhere in the UK.
The exit strategy is restricted to the sale of the main residence only. Part and part mortgages – a middle-ground between repayment mortgages and interest only mortgages – are also allowed, subject to the same criteria.
The society has set these parameters to mitigate the risk of future negative equity and to make sure there is a realistic means of repaying the debt at the end of the mortgage term, YourMoney.com‘s sister title Mortgage Solutions understands.
The minimum income requirement is £75,000, or £100,000 for joint income. There is a minimum term of 25 years, or retirement if sooner.
Mortgage Solutions understands this is because Nationwide wants to target the proposition at higher earners who want to use interest-only for flexibility, not because they cannot afford a full repayment mortgage.
Henry Jordan, Nationwide director of mortgages, said: “As the UK’s second largest lender, it is natural that we continue to look at ways we can support the mortgage market.
“At almost seven per cent, interest-only remains an important part of the market and one we are keen to support by providing access to our standard product range to applicants with good equity and stable income profile.”
The launch is expected within the next two months.
What’s the problem with interest-only?
Interest-only mortgages were once the norm in the UK. However, since the financial crisis they’ve become less common as lenders became concerned people had taken out a loan and had no means of paying the capital back.
When you take out an interest-only mortgage, your’re supposed to make a monthly repayment into an ISA or other investment. The hope is that the investment will then generate sufficient returns to pay off the capital sum you still owe at the end of the mortgage term.
However, during the property boom years many people relied on the value of their property going up and selling it for a profit down the line. When property prices stalled, this caused serious problems for people relying on increasing values to repay their loan.
To avoid this situation, most mortgage lenders now make it very difficult for borrowers to take out interest-only mortgages. They may demand a very big deposit and/or ask for tangible proof that you have an investment plan in place to pay off the mortgage at the end of the term.