Nationwide Building Society has announced that it will stop granting new interest-only mortgages to customers from 11 October.
Taking out an interest-only mortgage means lower mortgage repayments so many borrowers took them out to allow them to borrow more money than they would otherwise be able to afford.
However, unless they have a repayment vehicle in place, such as an investment or savings account that accumulates enough money, there is a risk that they may not be able to pay off the original loan at the end of their mortgage term.
Borrowers also end up paying more interest in the long run as they are paying interest on the whole loan amount for the whole term, unlike a repayment mortgage, under which the capital owed gradually reduces.
Low demand for interest-only mortgages
A Nationwide spokesperson said: ‘Less than 3% of new mortgage applications at Nationwide are for interest-only and the vast majority of those are borrowers who are already on interest-only and are looking to switch to a new deal or remortgage.
‘Our existing customers who are on interest-only can continue on that basis but there isn’t a significant demand for this type of new lending anymore.’
Nationwide also said that customers increasingly want the certainty of a repayment mortgage, which guarantees that they will have paid if off by the end of the mortgage term.
Existing interest-only mortgage customers will be able to take their mortgage with them if they move to a new home.
The Royal Bank of Scotland also recently announced that it will no longer grant new interest-only mortgages to customers unless they are taking them out through mortgage advisers so that their suitability for the product can be properly assessed.
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.