Skipton restricts interest-only mortgages

Skipton Building Society has introduced a £40,000 minimum income requirement for all residential interest-only and part-interest-only applications.

The move is the latest in a long line of interest-only restrictions imposed by lenders in the last year as the market has clamped down on the option. Skipton's change applies to the gross income of the main earner on an application.

It will accept 100 per cent of permanent basic income and guaranteed bonus or overtime payments and 50 per cent of regular, but not guaranteed, bonus payments.

The lender will also accept 100 per cent of working tax credits or benefits or pension and 100 per cent of of car allowance and maintenance payments, if evidence is supplied.

For pure interest-only deals Skipton plans to lend up to 60 per cent loan to value but will go up to 80 per cent loan to value for a part-interest-only and part capital repayment mortgage.
Skipton move follows Barclays' decision to introduce a minimum income of £75,000 on interest-only deals.

It shows there is a new focus on income for interest-only home mortgages and not on loan size as has been the case previously.

Barclays decided to move from a minimum £300,000 loan to a minimum income sparking fears interest-only would become a rich person's deal.

New rules

Almost three million borrowers in the UK are on interest-only mortgages but the Financial Conduct Authority, the regulator, has launched a crackdown.

In new rules set to come into force in April 2014 all borrowers will need to show a legitimate repayment method and not just rely on sporadic contributions.

In reality, most lenders have begun to apply these rules over the last year with a number withdrawing from the sector or cutting back on lending.

Nationwide Building Society has stopped all new lending on interest-only after warnings from the FCA.

The FCA argues that lenders have over-reacted to its rules by reining in lending and that they should keep lending, just with an extra degree of caution.

Lending maze

The mass withdrawals and constantly changing criteria, as shown by Skipton, puts the interest-only market is in a state of flux at the moment.

If you are someone who receives an irregular income such as commission or bonus payments then interest-only can be the ideal solution.

It means you can make minimum monthly payments and then pay down your mortgage as and when you receive your bonus payments.

The new restrictions makes this more difficult and Skipton's criteria is just one example of a lending maze that is difficult to navigate.

The best way to shop around and find out the best deals is to speak to an independent mortgage broker to look around the market.

Open for business

Interest-only deals are still open to wealthy borrowers as lenders look for greater security that they will be paid back and income is one way of doing it.

Borrowers earning less than minimum incomes can still get interest-only mortgages but they have to look harder around the market to navigate the new restrictions.