Interest-only mortgages will no longer be available from Co-operative Bank from 8 May 2012.
From next week, new customers at Co-operative Bank will only be able to take out repayment mortgages. The change will not affect existing interest-only mortgage customers.
The changes will also apply for mortgages taken out through Britannia, as well as residential mortgages offered through Platform, the intermediary lender for Co-operative Bank.
Why has the Co-op scrapped interest-only mortgages?
With interest-only mortgages you only pay back the mortgage interest to your lender. You don’t actually repay any of the money you originally borrowed (the ‘capital’). As a result, interest-only mortgages can be more affordable in the short-term.
However, as you’re not paying back any of the capital, there’s a risk that you’ll be trapped in negative equity if house prices drop. And if you don’t build up a separate fund to repay the mortgage, you may struggle to switch mortgages if your interest rate goes up. Earlier this week, Which? revealed that over a million consumers will face a £300m hike in mortgage repayments over the next year as lenders increase standard variable rates (SVR) and variable rates on home loans.
You’ll also pay more interest overall on an interest-only mortgage as you are paying interest on the whole loan for the whole term.
Head of mortgages at the Co-operative Bank James Hillon said: ‘The mortgage market has changed greatly in the last four years. 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.’
Need mortgage advice?
We believe you should seek independent mortgage advice before taking out a mortgage. The Which? Group offers an independent mortgage advice service, Which? Mortgage Advisers, that looks at every mortgage from every available lender. You can also find an independent mortgage adviser using the Unbiased.co.uk website.