Co-op withdraws interest-only mortgages
Interest-only mortgages will be unavailable to new customers of The Co-operative Bank from 8 May.
It's the first high-street lender to pull out of this market and blames the move on a fall in demand for these products as today less than 10% of new customers take one out, a fall from 25% in 2007.
Customers on interest-only mortgages only pay the capital debt at the end of the mortgage term and therefore have much lower monthly repayments.
Dying a death
But the Financial Services Authority (FSA) has warned that many customers are unable to pay back these loans on time. Its Mortgage Market Review, which is due in 2013, is expected to tighten up lending for interest-only mortgages by making sure lenders only grant loans to borrowers with the capital to repay them.
"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," says Dominic Hennessy, spokesperson for Just Us Mortgages.
The changes won't affect existing customers but if lending criteria change they may be unable to switch onto another interest-only deal. At this point they'll either have to remain on the existing mortgage or switch to a repayment mortgage.
James Hillon, head of mortgages for The Co-op, says: "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 that 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."
Clare Francis, mortgage expert for moneysupermarket.com, says the clampdown on interest-only mortgages isn't likely to have a major impact on the housing market in the near term.
"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," she adds.
These changes will also affect mortgages offered through Britannia and Platform, intermediaries for the Co-op.
A “traditional” mortgage, where the monthly repayments entail of repaying the capital amount borrowed as well as the accrued interest, so that during the loan period the capital debt is gradually paid off so by the end of the term the mortgage has been fully repaid. One advantage of a repayment mortgage is that it removes the risk of having a parallel investment (such as an endowment policy or pension), the performance of which is dependent on the stockmarket, such as with an interest-only mortgage.
The Financial Services Authority is an independent non-governmental body, given a wide range of rule-making, investigatory and enforcement powers in order to meet its four statutory objectives: market confidence (maintaining confidence in the UK financial system), financial stability, consumer protection and the reduction of financial crime. The FSA receives no government funding and is funded entirely by the firms it regulates, but is accountable to the Treasury and, ultimately, parliament.