Nationwide pulls interest-only mortgages for new borrowing

Nationwide Building Society has announced that it will no longer offer new interest-only mortgages.

The announcement could be the beginning of the end for the cheapest type of mortgage, a type that has allowed many people to get on the property ladder for the first time.

Interest-only mortgages allow homeowners to only repay the interest on a loan without repaying any of the capital at all until the end of the term, usually 25 years. Lenders and borrowers should have a separate investment vehicle in place to allow separate funds to mature to repay the capital at this time.

Interest-only mortgages have also been very useful for certain types of earners, for instance sales people who receive large bonuses and the self-employed who receive irregular income. an interest-only mortgage allows them to maintain their mortgage interest payments and pay off lump sums of the capital at various times.

The decision could lead other lenders to pull interest-only mortgages for new customers or existing customers looking to remortgage on an interest-only basis.

Nationwide said that only three per cent of its new mortgages are arranged on an interest-only basis.

In a statement Nationwide said: “Evidence shows that its borrowers increasingly want the certainty that repayment mortgages can provide. 

“Existing interest-only customers can continue on an interest-only basis, and can port their existing product, if they want to move home.”

Since base rate was cut to its record low of 0.50 per cent, mortgages have become cheaper so there is less reason for a borrower to opt for an interest-only deal, but there are always circumstances that mean certain homeowners have no option, at least for a limited time.

However, the decision by the Nationwide, the UK’s biggest building society will be a worry for some and could be considered as a landmark for the UK mortgage sector in future years.

And some commentators believe the decision is political as much as financial. Thousands of people were granted interest-only mortgages before the credit crunch with no consideration from lenders of a repayment plan to pay back the actual capital lent.

The Financial Services Authority (FSA) is expected to lead an investigation into the mis-selling of interest-only mortgages in the coming weeks.

Craig Lowther, Managing Director of PPI claims company, MoneyBoomerang, said: "Risk aversion, while a major contributing factor, is not the only reason for the high street lenders' gradual withdrawal from interest-only mortgages.

"Lenders are also attempting to distance themselves from the next major mis-selling scandal, namely mortgages.

"A vast number of people who took out interest-only home loans in the nineties didn't have the faintest idea that they had to contribute to a separate repayment vehicle.

"In essence, they were mis-sold, and dramatically so. The result is that many will now be facing massive debts at the end of their mortgage term, or in some cases even worse.
"I have no doubt the gradual retreat from interest-only is as much a political decision as it is one based on risk."

Data shows that about 43 per cent of the 11.2 million mortgages in the UK are on an interest-only basis

However, some believe that Nationwide are overreacting and that the interest-only option remains an important segment of the mortgage market.

Lee Karasavvas, director Prolific Mortgage Finance, said:  "This is a massive overreaction from the Nationwide.

"Interest-only used to be at the core of the mortgage market but it's now very much on the periphery.

"It's ludicrous to suggest interest-only is high risk. If there's a genuine and viable repayment strategy then it's no higher risk than any other loan.

"Expect a raft of other lenders to follow in Nationwide's footsteps in the weeks and months ahead.

"Interest-only is destined to become a niche product offered by a small collection of private banks."

However, Ben Thompson, MD at Legal & General Mortgage Club, believes it will be an opportunity for other lenders to fill the breach.

He said: “What's most interesting is what happens next. Some will no doubt follow this move as they won't want to be selected against for interest only however others will see this as an opportunity.

“It is clear that for the lenders that are prepared to take the necessary steps and checks required to assess the genuine plausibility of interest only repayment plans, this represents an opportunity.”