Nationwide Building Society becomes the latest lender to pull out of the increasingly marginalised interest-only mortgage market.
Nationwide Building Society is the latest lender to pull out of the interest-only mortgage market. From 11th October this type of mortgage will no longer be available from the lender.
Existing borrowers who already have an interest-only mortgage through Nationwide will not be affected by the changes but will not be able to borrow any more money on an interest-only basis.
Nationwide latest to leave
Within the last year these products have gone from a mainstream, albeit slightly risky, way to borrow, to a niche product which is almost impossible to get hold of.
Today, Nationwide has joined several other lenders, such as the Co-operative Bank, in shutting off its interest-only mortgage arm. At the moment only 3% of its new mortgages are interest-only and it says borrowers are far more likely to want repayment mortgages.
Many lenders, including the Derbyshire, Cheshire, Dunfermline and Coventry Building Societies, have also upped their criteria when approving these loans in the past year. Royal Bank of Scotland announced changes to its interest-only policy just this week.
Nationwide has already changed its interest-only lending process earlier this year by only accepting new borrowers who have at least 50% equity in their homes.
Experts believe other big lenders will follow Nationwide's lead and also pull out of the interest-only market.
Growing concerns about interest-only mortgages
Lenders have been clamping down on interest-only mortgages for some time now and the market has pretty much been shut off to new borrowers.
This type of mortgage was originally designed as a borrowing method for people who preferred to pay off their capital debt in a lump sum at the end of a mortgage term. Borrowers would therefore just pay the interest on the loan, rather than making payments to clear the loan itself.
This means monthly payments are much lower than with a repayment mortgage, but you’re also hit with a massive debt when the plan comes to an end. Before the credit crunch, lenders were a lot more lenient with their criteria and therefore many interest-only mortgages were approved without much thought going into how the borrower would repay the debt at the end of the term.
Today, the situation has changed greatly and to get one of these mortgages you need to provide extensive proof of how you aim to repay the debt, in addition to a sizeable deposit. This is to make sure the debt is paid off in full, but also greatly reduces the number of people able to be accepted for this kind of mortgage.
However, alarming figures, such as the ones recently produced by data firm Xit2, suggest there are over £160 billion-worth of interest-only mortgages due to mature in the next eight years where the borrower has no repayment plan in place.
What to do if you’re on an interest-only deal
If you currently have an interest-only mortgage and you're worried about how you're going to repay it, you should review your situation sooner rather than later. There are options available, which we outlined in Your options if you're struggling to pay off your interest-only mortgage.
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RBS tightens interest-only mortgage criteria