Borrowers on interest-only mortgages are facing a tough time as banks respond to new regulations from the Financial Services Authority (FSA). Lloyds, Halifax, Barclays and Santander are all tightening the criteria they use to judge how customers will repay their loans.
One of the most controversial moves is Barclays’ announcement that it will no longer assume that stocks and shares Isas will return any growth for interest-only mortgage holders. Meanwhile, Santander has doubled the deposit required for new interest-only mortgages to 50% from 25%. That’s expected to prevent more than 300,000 of its customers from re-mortgaging.
Mortgage brokers fear that other banks are likely to follow Santander’s move. Lloyds Banking Group, which owns Halifax, is introducing checks to make sure its customers are saving enough money to cover 120% of themortgage debt by the end of the 25-year loan period. The moves follow the FSA’s review of the mortgage market, which called for tighter controls on interest-only mortgages.
• Homebuyers struggling to cope with rising mortgage fees have been handed a lifeline by the Post Office. It has launched a five-year fixed-rate mortgage charging 3.55% with no arrangement fees. It requires a 25% deposit, meaning it’s probably out of reach for most first-time buyers.
Extra benefits, such as free valuation and legal work, can only be claimed by re-mortgaging customers. Of course, while it’s great to avoid fees, that’s not much use if the interest rate isn’t competitive. Fortunately, it is.
The market leader is Chelsea Building Society’s 3.34% mortgage, which charges a £1,495 fee. According to Moneysupermarket.com, the Post Office’s offer is the best five-year deal for a loan of up to £127,000. Anything above that and the Chelsea Building Society would work out cheaper.
• Current-account users are being squeezed by desperate banks, according to the latest figures. Paid-for accounts now outnumber free current accounts for the first time. A monthly fee is now charged on 54% of all current accounts, compared to 47% three years ago, says data firm deFacto.
• Paid-for accounts aren’t only more common, they are also becoming more expensive. The average monthly fee has risen almost 13% from £15.36 to £13.62. Banks tempt customers on to the accounts by offering extras, such as car breakdown cover and travel insurance. However, consumer group Which? has warned that the fees often outweigh the perks.
Customers using free current accounts have been targeted in other ways. Interest rates on authorised overdrafts are up, while the interest rates paid out on balances in credit are down. With banks struggling with falling revenues in other businesses, such as investment banking, it seems that the retail customer is the easy target.