The Co-operative Bank has announced that from next Tuesday it will no longer offer mortgages on an interest-only basis.
New customers will be able to take out mortgages on a capital and repayment
basis only. Existing interest-only
mortgage customers will not be affected by the change.
The Co-op said they will still be able to switch to any product from the lender's mortgage range for the same amount of borrowing on an interest-only basis when they come to the end of their deal.
The lender said the changes will also apply for mortgages offered through Britannia and residential mortgages offered through Platform, the Co-op's intermediary arm.
It said that a combination of factors including falling house prices
and uncertainty about the direction of interest rates have led to a rapid decline in demand for these loans.
The lender added that currently less than 10% of its new mortgage customers are taking out mortgages on an interest-only basis.
James Hillon, head of mortgages at The Co-operative Bank, said:
"The mortgage market has changed greatly in the last four years and as a responsible lender we closely monitor these developments. With house prices continuing to stagnate, we're seeing that buyers are increasingly taking a long-term view to homeownership rather than seeing it as a route to watch their money grow quickly, as was the case for many in the property boom years from the late 1990s onwards.
"We understand that all our customers have individual requirements and as a responsible lender we remain committed to working with them to find an affordable solution to owning their own home.
"For example we know that many customers historically turned to interest-only mortgages as a way of meeting monthly outgoings when on a variable monthly income. For these customers we continue to offer a range of mortgages which enable them to make overpayments
as and when they can afford to, then use their overpayments fund to meet repayments in the months where they earn less."
Platform said the majority of its lending is focused on buy-to-let and volumes of mainstream and almost-prime interest-only applications are low.
It also believes demand for interest-only loans will continue to fall. It said that as a result, the cost of changes that it would want to make in order to comply with future regulations and meet its high standards as a responsible lender cannot be justified.
Platform will continue to offer interest-only as a payment option for buy-to-let,
as the rent on the property is typically used to make monthly repayments and the capital value of the property is used as the repayment vehicle for the mortgage.
Dominic Hennessy of independent mortgage broker, Just Us Mortgages, commented:
"The Co-operative Bank's decision to pull out of interest-only is the latest piece of bad news for British borrowers.
"Not only are rates going up and criteria becoming more stringent by the day, but now the range of products available is being cut down severely.
"Interest-only is dying a death by a thousand cuts. It's only a matter of time before other lenders follow suit. Its days are surely numbered."