Co-operative Bank ends interest-only mortgages

| May 4, 2012
Co-operative Bank ends interest-only mortgages

The Co-operative Bank will stop offering interest-only mortgages from next Tuesday, but the decision will not affect existing customers.

A recent report by the Independent on Sunday suggested that a quarter of a million people with interest-only mortgages will reach retirement age by the end of the decade with a substantial capital debt still to pay.

Customers on interest-only mortgages only pay the capital debt at the end of the mortgage term and while this means they benefit from lower monthly repayments, increasing numbers of people are finding themselves unable to repay the debt.

Since the credit crunch, investments and endowments have performed badly, and people relying on investments to pay off their interest-only mortgage are finding there is a substantial shortfall.

The fall in house prices in recent years has added to the problem, leaving many people in negative equity, when they previously could have relied on appreciation in the value of their property.

People living in the north of England have suffered particularly badly, with house prices failing to show any increase since 2007.

The FSA is calling for lenders to offer interest-only mortgages to borrowers with a credible plan to repay the capital, however it seems likely that other lenders will follow the Co-op’s example and withdraw the product completely.

The FSA’s Mortgage Market Review, which will be published next year, is likely to introduce much stricter rules for interest-only mortgages.

The Co-op has experienced a rapid fall in demand for interest-only loans, with just 10 per cent of new mortgage customers taking out this type of mortgage, compared with 25 per cent five years ago.

Although interest-only mortgages are still available from other lenders, many have tightened up their lending criteria.

Santander, Nationwide, Coventry and Leeds building societies now only offer interest-only mortgages to borrowers with a 50 per cent deposit.

RBS/NatWest will only offer interest-only deals to borrowers earning £50,000 a year.

According to the Financial Services Authority 1.5 million interest-only mortgages, worth around £120 billion in total, are due for repayment by 2022.

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