Nationwide to scrap interest-only loans

Michael Bow
Follow Michael
ONE of the UK’s biggest mortgage lenders yesterday said it would withdraw interest-only mortgages to future homeowners from next week, in a further sign of the squeeze on higher risk lending.

Nationwide Building Society, the third biggest mortgage lender in the country, wrote to brokers yesterday saying it would stop offering the mortgage on 11 October with final applications available to borrowers until 5pm on 10 October.

The announcement is a blow to hopes that mortgage lending would jump sharply on the back of the government’s new Funding for Lending Scheme, which aims to encourage banks to offer more loans at lower rates. The scheme offers banks and building societies cheap finance if they increase lending to businesses or households.

Bank of England data showed on Monday that mortgage lending dropped by £276m last month – the sharpest decline since December 2010.

Nationwide said falling demand had led to yesterday’s decision. An upcoming tightening of lending rules by regulators is also understood to have contributed to the withdrawal – despite moves by the government to encourage banks to make cheaper loans to individuals.

The cut back follows a similar withdrawal of interest-only mortgages by the Co-operative Bank in May. Royal Bank of Scotland has also recently tightened its offering of the product, as banks shrink their mortgage lending criteria.

Nationwide said: “Only three per cent of [Nationwide’s] new mortgages are arranged on this basis, and evidence shows that its borrowers increasingly want the certainty that repayment mortgages can provide.”

Banking watchdog the Financial Services Authority had already called on banks to be more stringent on who they offer interest-only mortgages to.

In March, managing director Martin Wheatley labelled interest-only mortgages a “ticking timebomb” created over the last 20 years.

“The demise of interest-only reflects the ongoing nervousness among UK lenders,” said Lea Karasavvas, director of the independent mortgage broker Prolific Mortgage Finance. “Interest-only used to be at the core of the mortgage market but it’s now very much on the periphery,”

Coreco Independent Mortgage Brokers director Andrew Montlake said: “This is a massive step for Nationwide to take and it could well have a big effect on other lenders who have been monitoring this sector of the market closely.”

Experts say up to two million people could be left unable to pay back the principal sum at the end of their mortgage.

Interest-only mortgages gained a resurgence in popularity at the height of the debt bubble following a boom in the late 1980s, when 80 per cent of mortgages sales were interest-only.