The squeeze on availability of interest-only mortgages continued today when a major lender announced plans to withdraw its range of products for new customers.

The Co-operative Bank will only offer mortgages on a repayment basis from next Tuesday, though its 60,000 customers who already have interest-only mortgages are unaffected.

The cull, the first complete axe from a major lender, will also apply to mortgages offered through its Britannia and Platform brands.

Brokers say this type of mortgage is "dying a death". A number of lenders have reined in their interest-only offers in recent months.

  • Santander, as well as Nationwide, Coventry and Leeds building societies, only offer such deals to borrowers with a 50% deposit.
  • RBS/NatWest demands borrowers earn 50,000 a year before it will offer an interest-only deal.
  • Manchester Building Society is trying to force some borrowers from interest-only to repayment deals, using a clause deep in its small print.

With an interest-only deal, borrowers only pay the interest during the term, with the debt itself being settled on maturity. With a repayment mortgage, monthly payments cover both the interest and capital.

Borrowers stuck

The shrinking of the interest-only market means many borrowers could struggle to find another similar deal, which could mean monthly costs soar.

Only those with significant equity in their property and a good credit score will qualify, while others may have to swallow a rate rise or be forced to switch to repayment.

On a typical 150,000 mortgage with 15 years remaining at 3%, monthly payments would jump by 660 if a borrower moved from interest-only to repayment.

Of course, it is prudent to pay off your mortgage, though brokers say interest-only makes sense for some groups, such as the wealthy.

The Financial Services Authority recently warned an estimated 1.5 million such loans worth around 120 billion are due for repayment in the next decade.

'You can't rely on house price rises'

James Hillon, the Co-op's head of mortgages, says: "What we have seen in house price drops over the last four or five years has given rise to a dawning realisation you can't rely on a rising appreciation in your home to pay off your mortgage."

The average Co-op customer with an interest-only deal owes the bank 77,000.

The news comes in the week more than a million homeowners have also seen their mortgage repayments rise after several lenders announced rate rises, blaming the weak economy and the increased cost of funding a mortgage (see the Mortgage hikes MSE News story).

Dominic Hennessy, of mortgage broker Just Us Mortgages, says: "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."

Last week, David Hollingworth, from broker London & Country, wrote a guest blog for which echoed those thoughts.

According to the Council of Mortgage Lenders, more than 95% of first-time buyers have been taking out repayment loans since the summer of 2011.

Additional reporting by the Press Association.