The Co-operative are the first bank to axe the interest-only mortgage

The Momentum UK Team 03 May 2012

Amidst Financial Services Authority warnings that interest-only mortgage offerings encourage irresponsible lending, the Co-op are the first high street bank to walk away from the interest-only lending market.

Interest-only mortgages allow borrowers to pay off purely the interest on their mortgages and not the capital.This tends to prove a cheaper alternative to the capital repayment method however problems often occur at the end of the mortgage term when borrowers still have the original capital debt left to pay. These types of mortgages were particularly popular 3 years ago in line with the surge of property prices.

From 8th May, new mortgage borrowers at The Co-op will only be offered capital repayment options. The bank explicated that this is due to a ‘rapid’ decrease in the demand for interest-only mortgages, stating that just 10pc of their new mortgage customers were taking out interest-only loans which is nearly 25pc less than in 2007.

James Hillion, Head of Mortgages at The Co-operative stated:

“What we have seen in house price drops over the last four or five years has in itself given rise to a dawning realisation that you can't just rely on a rising appreciation in your home.That has driven the reduction in the volume (of people taking out interest-only mortgages) that we've seen."

The announcement comes shortly after FSA encouraged banks to tighten their criteria for interest-only mortgages, suggesting that borrowers should only be allowed to opt for interest-only options if they have feasible plans in place to repay the capital not just the hope that house prices will rise. In February, Lloyds TSB clamped down on their interest-only mortgage procedures so that new customers could only choose the option if they had substantial assets in stocks and shares.

The Co-operative assured that existing interest-only mortgage customers will not be affected however if they need to buy any more money it will be charged on a capital and repayment basis. Customers will not be charged for switching from their interest-only mortgage to a repayment option.

Dominic Hennessey, broker from Just Us Mortgages suggested that the Co-operative’s announcement marks the beginning and homeowners could struggle to find interest-only mortgages elsewhere as banks constrict their lending principles in line with the weak economic climate.

"Lenders are massively risk-averse right now. This is the latest example of that fear translating into reduced mortgage availability for borrowers. The mortgage market is already on the ropes and the gradual withdrawal of interest-only loans could be the knockout punch.”

"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."

Mark Harris, Chief Executive of SPF mortgage brokers likened the interest-only mortgage lending demise to a game of ‘dominoes’ suggesting that it is ‘only a matter of time’ before the other lenders cut their interest-only offerings completely.