Lloyds to start checking repayment vehicles

Lloyds Banking Group is to introduce spot checks on its interest-only mortgage customers to ensure they have the means to repay their loans.

The lender will contact brokers to complete random assessments on interest-only mortgage deals to provide evidence that the repayment vehicle pledged by customers actually exists.

Lloyds is currently completing a strategic review of this part of its business, after the lender revealed earlier in 2010 that interest-only customers will pay 0.2% more than people with capital repayment mortgages.

The bank has also trimmed the methods of repayment it deems acceptable, excluding business sales, an inheritance or the sale of property to secure the deals.

Prospective customers must demonstrate an endowment, equity ISA or other investment to repay their loan, with a pension, savings or money from the sale of a second home in the UK required.

Unlike repayment mortgages, under which homeowners gradually repay the money they have borrowed, on interest-only ones borrowers only make payments to cover the interest they are charged.

But people are expected to have some way of repaying the money they have borrowed at the end of the mortgage term, usually by putting the money they have saved on monthly repayments into some kind of investment.

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