Lenders nervous of interest only mortgages

At the end of last week, Kensington announced its decision to temporarily withdraw from the mortgage market, after having already reduced loan amounts and raised interest rates for some new customers. Kensington is a specialist mortgage provider offering adverse credit, self-certified and buy-to-let mortgages. It was acquired by Investec, the investment bank, in August of this year.

Kensington and other such specialist lenders source funds from the capital markets rather than from deposits by savers. As a result, pressures on the money markets are felt almost immediately. Some other mortgage lenders are reported to be moving out of the interest only market because, in the light of recent events in the US sub-prime mortgage sector, the risks are seen as too high.

Concerns are increasing over the growing number of UK home buyers who have interest only mortgages but have not taken out investments alongside their mortgages to pay off the capital they have borrowed. In this situation, borrowers may need to find a large sum of money at the end of their mortgage terms. In June of this year, 21% of first-time buyers secured an interest-only loan with the lender having no knowledge of any investment plan in place to pay off the capital.

The Council of Mortgage Lenders is currently carrying out research among its members to explore practices and approaches to the long-term issues of repayment. At the end of last week, Kensington announced its decision to temporarily withdraw from the mortgage market, after having already reduced loan amounts and raised interest rates for some new customers.