Coventry Raises Interest-Only Mortgage Limit to 75% But Equity Rules Still Shape Who Benefits

Coventry Building Society has increased its maximum residential interest-only lending from 50% to 75% loan to value, a material change for borrowers whose mortgage plans were previously constrained by the amount of equity they needed to retain in their home.

The expansion, reported by Mortgage Solutions on 19 October, also reduces the minimum equity requirement outside London and the South East from £300,000 to £200,000. For suitable applicants, the combination could alter both the size of the available loan and the amount of cash needed for a purchase.

It is a development with particular relevance to business owners and borrowers with substantial investments. Someone with the resources to buy a home outright may still want to consider borrowing, especially where committing cash to the property would disrupt other financial plans.

However, the announcement should be read carefully. A higher interest-only limit does not automatically increase the mortgage an applicant can afford, and 75% will not be available against every property. The interaction between percentage limits and minimum equity is central to understanding the change.

A £250,000 Difference on a £1m Purchase

Consider a hypothetical buyer purchasing a £1m property outside London and the South East. At the previous 50% interest-only limit, the loan ceiling based on LTV was £500,000.

At 75%, that calculation becomes £750,000. The borrower would contribute £250,000 towards the purchase price rather than £500,000, before acquisition taxes, legal fees and other costs.

That is £250,000 less cash committed to the property at completion. For an entrepreneur planning business expenditure, or an investor who would otherwise sell assets, the difference could be significant.

It is also £250,000 more debt. The retained money has a matching liability, and interest must be paid on the larger balance. The change creates a financing choice; it does not create additional wealth.

These figures assume the purchase price and lender valuation are both £1m. A lower valuation, a restricted product or an applicant’s individual circumstances could reduce the available borrowing.

The Regional Equity Rule Changes the Calculation

Coventry’s published criteria retain a £300,000 equity requirement in London and the South East. Importantly, the regional equity requirements apply regardless of the chosen repayment plan.

This means a buyer cannot simply multiply every purchase price by 75% and treat the result as their potential mortgage. Both the percentage limit and the cash equity requirement have to be satisfied.

For the £1m London example, borrowing £750,000 would leave only £250,000 of equity. The regional minimum therefore reduces the ceiling to £700,000, equivalent to 70% LTV.

For the £600,000 example outside those regions, the equity requirement is also the binding constraint. A £400,000 mortgage leaves £200,000 of equity, whereas borrowing the full 75% would leave too little.

The practical implication is that the same headline policy produces different outcomes according to property value and location. A meaningful assessment needs to establish which limit actually constrains the proposed transaction.

More Flexibility Does Not Remove the Income Test

Coventry requires applicants to demonstrate sufficient income for an equivalent repayment mortgage and pass its repayment affordability assessment. It also does not accept new applications combining repayment and interest-only borrowing.

This matters because the monthly payment on an interest-only loan does not include scheduled capital repayment. Comparing that payment with household income alone would miss the lender’s separate affordability test.

For example, a borrower might feel comfortable paying interest on £750,000 while being unable to qualify for that amount under the lender’s assessment. Substantial assets do not automatically resolve that difference.

Equally, a borrower whose income already supported a larger mortgage may previously have been restricted by the interest-only LTV ceiling. That is where the policy change could have a more direct effect: the obstacle may have been the permitted structure rather than the underlying income.

The distinction helps identify which enquiries deserve renewed attention. A previous affordability shortfall and a previous LTV restriction are different problems, even if both resulted in the same proposed purchase failing to proceed.

Retained Capital Comes With an Ongoing Cost

The appeal for some wealthy borrowers will be the ability to retain more capital outside their home. That could mean preserving a cash reserve, avoiding an immediate investment sale or maintaining funds already allocated to other commitments.

Whether that is worthwhile depends on the cost of borrowing and the purpose of retaining the money. A larger mortgage creates a continuing expense, while returns on investments or business activity remain uncertain.

A business owner should also distinguish personal resources from company money. Cash held by a company is not automatically available for a director’s house purchase or mortgage repayment. Access, ownership and tax treatment need to be understood with the relevant professional advisers.

Keeping funds invested may be consistent with a long-term plan, but the mortgage still needs to work if those investments disappoint. A strategy that depends on strong returns every year leaves less room for an unexpected business slowdown, market fall or personal change.

For that reason, the appropriate comparison includes both the initial cash retained and the future obligations accepted. Choosing a lower loan can remain sensible even where the lender permits more.

The Repayment Plan Remains a Separate Decision

Reported repayment options include selling the mortgaged home, selling another unencumbered property, pension lump sums and stocks and shares ISAs. Each needs to be assessed against the lender’s detailed requirements.

Acceptance of an asset category does not mean its entire headline value counts towards repayment. Coventry’s criteria, for example, assess stocks and shares ISAs at a maximum of 80% of their accrued value at application.

The wider planning question is whether the asset can realistically be used when the mortgage capital falls due. Money intended to repay the home loan cannot also be assumed to fund retirement spending, family gifts and other commitments in full.

A planned asset sale also introduces timing risk. The borrower may need to sell in conditions they would not otherwise choose, or use an alternative source of money if the original plan falls short.

Downsizing Plans Need More Than Today’s House Value

For homeowners expecting to move to a smaller property, repayment through a future sale may appear straightforward. The home is sold, the mortgage is cleared and the remaining proceeds fund the next stage of life.

In practice, the calculation needs to include the replacement home, moving expenses and the possibility that the current property achieves a lower price. A substantial equity figure today is not a guarantee of sufficient purchasing power at the end of the mortgage term.

A simple stress scenario illustrates the exposure. If the £1m property in the earlier example fell in value by 20%, it would be worth £800,000. With a £750,000 interest-only balance still outstanding, equity would be £50,000 before selling costs.

This is not a forecast. It demonstrates how borrowing a larger proportion of a property’s value increases the sensitivity of the borrower’s remaining equity to price movements.

Where downsizing forms part of the plan, the discussion should therefore address the intended destination and likely housing needs. The willingness to sell is only one part of a workable repayment strategy.

A Reason to Revisit Cases, Rather Than Assume a Switch

The most immediate opportunity concerns prospective borrowers whose earlier plans were constrained by Coventry’s previous limits. An updated assessment could establish whether the revised structure now fits the intended purchase.

Existing homeowners may also want to review their arrangements, but a new lending option does not automatically justify remortgaging. Early repayment charges, fees, the new interest rate and the remaining term can materially change the comparison.

For financial planners and accountants, the announcement creates a useful point of coordination. Before a client sells investments or changes planned withdrawals to fund a home, the available mortgage structure can be considered alongside the wider advice.

Willow’s role is to connect those decisions: how much borrowing is suitable, what capital needs to remain available and how the debt will ultimately be repaid. Product availability and the full criteria should be checked against the actual application.

Coventry’s expansion is a meaningful addition to the choices available to suitable borrowers. Its value lies in allowing a different balance between property equity and capital held elsewhere, provided the income, costs and repayment plan support that balance.