End of interest-only for Nationwide

Nationwide have announced they will no longer offer interest-only mortgages, in a move that some say will trigger other lenders to do the same.

Related topics:  Mortgages
Amy Loddington
5th October 2012
Mortgages
Taking effect from 11th November, they will no longer offer interest-only to new borrowers, although those customers already borrowing on that basis will be able to continue to do so. Nationwide is the first lender to completely axe interest-only, although RBS recently announced their decision to offer it on an advised basis only.

Clare Francis, mortgage expert at MoneySupermarket.com said:

"Nationwide's decision could certainly sound the death knell for interest only mortgages. It's a big decision for one of the country's largest lenders to pull out altogether, and if others follow suit, the days of interest only mortgages may be numbered.

"The vast majority of people nowadays opt for repayment mortgages and interest only loans have become a niche product, particularly as eligibility has become tight. However, there is nothing wrong with an interest only mortgage, as long as the borrower knows how they will repay the capital once the mortgage term ends, and a payment plan is put in place. That said, 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, but it may be a step too far for the industry to stop them all together. Most people with interest only mortgages are managing them well yet they're being penalised for the fact that they were not suitable products for a minority of people.

"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."

Ben Thompson, MD Legal & General Mortgage Club, comments:

"This will come as a surprise but probably not as a shock. The number of mortgages taken out on an interest only basis over the last year or so has been dropping significantly and therefore a decision like this now whilst frustrating for some, won't impact as badly as it would have done if pulled over a year ago.

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. There has for some time been a view that interest only would end up as some sort of niche, with a lengthier process and more regular checks in place, and a slightly loaded pay rate. It looks as though we might well have just seen the catalyst for this change."
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