Newcastle Building Society exits interest-only mortgages

| December 19, 2012
Newcastle Building Society exit interest-only mortgages

Newcastle Building Society has stopped offering interest-only mortgages to new borrowers, following the lead of the Royal Bank of Scotland, Nationwide, Co-operative bank and Coventry Building Society.

The decision will not affect existing Newcastle customers and applications for interest-only mortgages received before 14 December will still be processed.

Prior to the credit crunch, interest-only mortgages were a popular option as they offer the borrower a lower monthly outlay than repayment mortgages.

Borrowers only pay the interest on the mortgage each month, and wait until the end of the mortgage term to repay the capital in one lump sum.

In 2007 interest-only deals accounted for a third of all mortgages taken out but hundreds of thousands of homeowners have been unable to pay off their original debt, leaving them facing repossession of their home.

Financial regulator, the Financial Services Authority (FSA), has found that three-quarters of homeowners with interest-only mortgages do not have an adequate savings plan in place to repay their loan when the mortgage ends.

It is estimated that 1.3 million interest-only loan are due to be repaid in the next nine years, a situation which the FSA called a “ticking time bomb”.

The FSA is introducing new rules requiring lenders to ensure that borrowers have a credible repayment strategy in place before approving an interest-only loan.

The new rules, which will come into effect on 26 April 2014, are part of the FSA’s Mortgage Market Review, which covers the whole mortgage market.

For all types of mortgage, lenders will have to take into account a borrower’s net income, and any committed and essential expenditure, while borrowers will have to produce evidence of their income.

Lenders will also have to take into account the effect of possible future interest rate rises on mortgage repayment costs.

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