Co-op becomes latest lender to axe interest-only mortgages

New customers with the Co-op and its sister brands Britannia and Platform will only be able to take out repayment mortgages from 8 May onwards

Mortgage borrowers wanting an interest-only loan will find it even harder to get one from 8 May when the Co-operative bank withdraws from the market entirely.

New customers with the bank and its sister brands Britannia and Platform will only be able to take out repayment mortgages, paying back the interest due and part of the outstanding loan every month.

Existing interest-only customers will still be able to switch to any Co-op product on an interest-only basis for the same amount of borrowing when their current deal ends; they will also be able to take their interest-only mortgages with them if they move homes.

Switching to interest-only has been a last resort action for some struggling borrowers. But the Co-op claims that while such loans were popular in the past, a combination of falling house prices and uncertainty about the direction of interest rates has led to a rapid decline in demand, with just 10% of new customers applying for them now compared to 25% in 2007.

James Hillon, head of mortgages at the Co-op, said: “With house prices continuing to stagnate we are 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 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.”

The Co-op is the latest to respond to a mortgage market review by the Financial Services Authority, which said that while interest-only mortgages would still be permitted, the lender must be responsible for making sure a borrower has a credible way of repaying the loan at the end of its term.

Many banks have reacted by reducing the amount they will lend on an interest-only basis compared to the property value, or the types of investment they will accept as proof the borrower will be able to repay the loan.

Several lenders, including Santander, have reduced the maximum loan-to-value ratio on interest-only loans to 50%. Lloyds Banking Group will no longer accept cash savings, including Isas, as a credible repayment vehicle. It will accept equity Isas and endowments, but the borrower must have at least £50,000 invested and can only borrow up to 80% of the value of that investment. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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