The Nationwide building society will cease to offer interest only mortgages to new borrowers from 11th October, existing customers can keep their interest only mortgages, but not extend them.
Under pressure from the Financial Services Authority (FSA) a number of lenders have recently taken similar action. In May the Co-op bank ceased offering this type of mortgage, with Santander and HSBC now only lending to people with a minimum 50% deposit.
Last year the FSA announced that from 2013 it would enforce new rules to ensure that lenders check that borrowers have the ability to repay any loan at the end of the term.
Interest only mortgages account for only 3% of Nationwide’s new lending and are therefore considered not worth the hassle of checking that borrowers could repay.
During the recent housing boom interest only mortgages proved popular as borrowers felt the increase in the value of their property would allow them to pay off their loan and still have a deposit for any future purchase. Buy-to-let investors also favoured interest only mortgages to reduce the monthly outgoings.
In 2007 one third of new mortgages were sold on an interest only basis according to the FSA.