If you have an interest-only mortgage now could be the time to consider switching products before the window closes.

In the last two weeks, both Natwest and Coventry Building Society ceased offering interest-only mortgages for residential property following Nationwide’s decision to do the same some time ago.

Add to this the vast number of lenders who have restricted interest-only borrowing to less than 75%, 66% or even 50% of the property value and the market for these mortgages is now stricter than ever.

Borrowers on interest-only mortgages currently sitting on their lender’s variable rate should consider changing their mortgage to a new product now before the market contracts further.

With the FSA’s announcement that interest-only lending would become part of the mortgage market review following the credit crunch, many lenders have reacted in a kneejerk fashion, and Eliminated the option for customers with a suitable repayment strategy to refinance their loan regardless of the plausibility of their circumstances.

This is already creating a large number of mortgage “refugees” unable, simply due to the lender’s criteria to arrange a new mortgage and who then become trapped on a variable rate without the option to move.

Whilst this may not be the end of the world whilst the Bank of England Base Rate is low it could result in thousands more repossessions in the event of the collapse of the Euro.

This scenario would almost certainly see wholesale increases in lenders’ standard variable rates which many borrowers might find too large to handle.

For those in the last years of an interest-only mortgage or even halfway through with borrowing of more than 50% of their property value, waiting too long to consider a move to a new product could see them shut out of the market in the long term.

Of course, for those borrowers without a suitable strategy for repaying an interest-only loan, then this is the right time to think about switching either to a full repayment mortgage or alternatively, if investments such as endowments are not performing and are predicted to fall short of requirements, a part repayment and a part interest-only loan might be suitable.

For more information contact one of our whole of market advisors on 0845 4594490.

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Mortgage Broker Q&A; Interest only vs a repayment mortgage?

In Q&A, we take a look at some of the questions mortgage advisers deal with regularly.

Question; what are the pitfalls and benefits of an interest-only mortgage?

They say life is all about risk; this question is a prime example.

If you want the certainty that your mortgage is repaid in full (providing you keep up your payments), then you should take a repayment mortgage.

However, if the cost is too high in the short term, you could take an interest-only mortgage and move to a repayment mortgage later, although you should be aware that the interest paid will be dead money and not reduce your debt.

If you take an interest-only mortgage in the long term, you are gambling that by investing wisely, you can outperform mortgage interest rates with your investments, producing a surplus by the end of the mortgage.

However, if your investment does not perform as planned, there will be a shortfall which you will have to find elsewhere at the end of the term.

But your investment must also outperform mortgage interest rates over the full loan balance; and the entire term.

Whereas if you take a repayment mortgage, the capital part of your payment would gradually reduce the interest element, so like for like, you will repay more interest over the term on an interest-only basis too.

Also, income earned from investments may be subject to further taxation, which increases the risks of shortfalls attached to interest-only loans.

That means interest-only lending on people’s primary residence is considered high risk and is harder to arrange.

On buy-to-let loans, interest only is commonplace. The reduced monthly payments give landlords more breathing space if a tenant fails to pay; allowing for the faster accrual of additional funds for other purchases.

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