Interest only borrowers set for severe payment increases when interest rates rise

With the Bank of England Base rate at a record low of 0.5 per cent, it is only a matter of time before interest rates in the UK start to rise.  Now, a new report from Moody’s has found that borrowers with ‘interest only’ mortgages would be significantly worse off than repayment borrowers were interest rates to increase.

Interest only borrowers facing 50 per cent hike in payments

Moody’s Credit Insight report suggests that if interest rates rise by 1.5 per cent over the next year and a half, an interest only borrower with a 20 year mortgage at a rate of 2.84 per cent would face an increase in their repayments of over 50 per cent.

This is compared to the same borrower on a repayment mortgage who would only see their payments rise by 13 per cent.

In its report it says: “In the previous example, interest rates would need to increase by at least 4 per cent for the interest paid by the repayment borrower to exceed the initial total monthly instalment.”

More lenders restrict ‘interest only’ loans

As concerns over the potential affordability of ‘interest only’ loans increase, increasing numbers of lenders are restricting the amount that applicants can borrow on an ‘interest only’ basis.

The Leeds Building Society became the latest lender to restrict ‘interest only’ deals recently by reducing the maximum loan to value for such mortgages to 75 per cent, from 85 per cent.  This follows moves by many other lenders, including the Halifax who reduced their ‘interest only’ limit to 75 per cent earlier this year.

The Leeds will continue to accept mortgage and remortgage applications to 85 per cent loan to value, but will require borrowers to split this.  They will allow 75 per cent to be on an interest only basis but the remaining 10 per cent will have to be arranged on a repayment basis.

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