The lender introduced the restriction in November 2012 at a time when several high street lenders seemed to be retreating from offering the product.

However, from 4 June 2013, the minimum loan size requirement will be abolished in favour of income qualification criteria. Borrowers must either be individuals earning at least £75,000 or have a joint income of at least £100,000. A joint application is also valid if one of the applicants earns at least £75,000.

If the sale of property is to be the repayment vehicle, the minimum loan size of £300,000 has been replaced by a minimum equity of £300,000. The maximum loan-to-value remains 50%.

A Woolwich spokeswoman said: “We remain committed to the mortgage market and interest-only mortgages. This change is not about restricting lending, it is about ensuring that customers for whom interest-only is appropriate have the flexibility they need, ensuring those customers that want to borrow less that £300k on an interest only basis are able to do so.

“We have already said that our focus is on the more affluent customer for interest only lending and this change reflects this”

Prolific Mortgage Finance managing director Lea Karasavvas said the move was a step in the right direction which could open doors in the London market where equity was often high and loan amounts small:

“In addition, it could be seen as an escape route for some customers with small mortgages but high equity that have been imprisoned with their current lender given the lack of options available to them in the interest only market.

“It will be seen as a very positive step in the market, and may be something that leads other lenders to consider the benefits themselves.”

The changes will not affect existing borrowers unless they take out a further loan.