Abbey have just announced that they are restricting the Loan to value (LTV) allowable on Interest only mortgages as follows
Without a repayment vehicle will be 50%
With a repayment vehicle will be 75%
This is a huge credit tightening. As has been discussed before this housing bubble was created because lenders increased the amount they would lend, did not check the incomes and did not require a repayment plan.
Now Abbey are saying if you do not have a repayment plan, you can only borrow 50%.
I'll explain the interest only part of this as follows.
A mortgage is either arranged on a repayment basis where the mortgage is gradually repaid or interest only which requires an investment plan to repay the loan in the future.
So interest only has lower monthly payments if you do not factor in the investment plan monthly payments.
Hundreds of thousands of first time buyers opted for interest only mortgages as they could not afford the monthly payments on a repayment mortgage, but they did not take out an investment plan.
So Abbey have at last decided that this is a risk to their business and have effectively ruled themselves out of the market for non repayment mortgages.