Lloyds TSB restricts interest-only mortgages

30 October 2008
Lloyds TSB mortgage borrowers who want to reduce their monthly payments could be blocked from switching to interest-only deals.

The bank says it will now prevent borrowers who own less than 25% of the value of their homes from paying just the interest on their mortgage. Instead, they will have to have capital repayment plans, where the interest and the mortgage debt are both reduced each month.

“In an environment where house prices are falling rapidly, the change has been made to encourage customers with high loan-to-value mortgages to protect the existing equity in their homes,” says Amanda Glover, a spokeswoman for Lloyds TSB. “Both new and existing borrowers with more than 25% equity can still switch to an interest-only deal.”

However, some experts say the bank’s decision is at odds with the government's pledge to help struggling homeowners. Before repossessing a property, lenders now have to demonstrate to the courts that they have explored all other options to help borrowers, including switching to interest-only deals.

“With house prices falling it’s always prudent for customers to avoid negative equity, owing more than their house is worth, but Lloyds TSB’s move is not hand in hand with the government’s wishes,” says Richard Morea, technical manager at mortgage broker London & Country.

“Interest-only mortgages are valuable to struggling borrowers who just need to reduce their monthly repayments temporarily,” adds Morea. “Preventing them from doing can make a desperate situation worse.”

But Glover stressed that this is not the case.

“If a borrower comes to us and specifically asks to switch to an interest-only mortgage because they are struggling to meet their repayments, we will of course consider it," she explains. "But the average person we see is someone who just wants to rejig their monthly outgoings. Our decision is not out of line with our competitors.”

According to Katie Tucker, technical manager at Mortgageforce, a number of lenders already adopt similar lending criteria, including the Nationwide, Woolwich and Abbey.

"For borrowers with Abbey who want to switch to interest-only deals, Abbey has certain criteria," says Tucker. “Borrowers are only allowed to switch to an interest-only deal if they own more than 50% of their homes, and must also detail how they plan to repay the rest.”

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