This change will not affect existing interest only mortgage customers.
Interest only mortgages have proven popular over the years, however a combination of factors including falling house prices and uncertainty about the direction of interest rates have led to a rapid decline in demand for these loans.
Currently less than 10% of new mortgage customers at The Co-operative Bank are taking out mortgages on an interest only basis; this figure has fallen rapidly over the last five years from almost 25% in 2007.
The Co-operative Bank fully supports the changes relating to interest only lending which are currently being proposed for 2013 under the FSA's Mortgage Market Review. We expect that these changes will see a move to all customers who apply for a mortgage being assessed on the basis that they can afford a capital and repayment loan. In line with these suggestions we are choosing to lend to new customers on a capital and repayment basis only moving forwards.
As a responsible lender, The Co-operative Bank remains committed to our existing interest only mortgage customers who will still be able to switch to any open product for the same amount of borrowing on an interest only basis when they come to the end of their deal. In addition they will also be able to take their interest only mortgage with them should they move home.
As part of this commitment, the bank also launched a communication programme to all its interest only customers to make sure they are aware of all of the options that are open to them with regards to their mortgage.
James Hillon, Head of Mortgages at The Co-operative Bank said:
"The mortgage market has changed greatly in the last four years and as a responsible lender we closely monitor these developments. With house prices continuing to stagnate, we're seeing that buyers are increasingly taking a long term view to home ownership 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 understand that all our customers have individual requirements and as a responsible lender we remain committed to working with them to find an affordable solution to owning their own home. For example 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 above changes will also apply for mortgages offered through Britannia and residential mortgages offered through Platform, the dedicated intermediary lender for The Co-operative Bank.
Dominic Hennessy of independent mortgage broker, Just Us Mortgages, comments:
"The Co-operative Bank's decision to pull out of interest-only is the latest piece of bad news for British borrowers.
"Not only are rates going up and criteria becoming more stringent by the day, but now the range of products available is being cut down severely.
"Interest-only is dying a death by a thousand cuts. It's only a matter of time before other lenders follow suit. Its days are surely numbered.
"Lenders are massively risk-averse right now. This is the latest example of that fear translating into reduced mortgage availability for UK borrowers.
"If demand for interest-only is down slightly, it's because people read the headlines and think it's no longer available anyway.
"For people with more erratic incomes, whose incomes are bolstered by bonuses, or who have other sources of income or wealth, interest-only gives them important flexibility and is a totally viable way to borrow.
"The mortgage market is already on the ropes. The gradual withdrawal of interest-only loans could be the knock-out punch."
Clare Francis, mortgage expert at MoneySupermarket.com said:
"We've seen a number of lenders tighten their criteria for interest only loans over recent months, but The Co-operative has gone one step further and will no longer offer them to new borrowers. This change is largely in response to the FSA's Mortgage Market Review and it wouldn't be surprising to see more lenders follow suit.
"There is nothing wrong with an interest-only mortgage per se, as long as the borrower knows how they will repay the capital once the mortgage term ends. However, there are fears that some of those with interest only mortgages do not have an adequate repayment plan in place which could cause major problems when their mortgage term ends. Making this type of loan harder to come by helps reduce the risk of the so-called ‘mortgage time bomb' exploding.
"The clampdown on interest only mortgages isn't likely to have a major impact on the housing market in the near term, though, as the vast majority of people opt for repayment mortgages. A repayment mortgage gives a guarantee that your debt will be paid off by the end of the term, so it's the simplest and often most appropriate option.
"Those most affected from the restriction in the availability of interest only loans will be borrowers who already have them. They may find they are unable to remortgage onto another interest only deal. As a result, they will either have to stick with their current mortgage or switch to a repayment loan which will mean an increase in their monthly mortgage payments. Anyone worried about this should speak to an independent mortgage broker for advice."
