Coventry Building Society stops interest-only mortgages

| November 30, 2012
Coventry Building Society stops interest-only mortgages

Coventry Building Society has stopped offering interest-only mortgages, following similar moves by RBS and NatWest, after demand for this type of product fell.

Nationwide and the Co-operative bank stopped offering interest-only mortgages earlier this year.

Colin Franklin, sales and marketing director at the Coventry, said: “Residential interest-only mortgages have declined to less than 2% of all residential mortgage applications.

“We have therefore decided the time is right to leave this market.”

Interest-only mortgages are rapidly becoming a niche product, although they are still offered by Santander.

The product was popular when the property market was booming at the start of the new millennium.

Interest-only deals accounted for a third of all new mortgage approvals prior to the collapse of the property market in 2007.

However a recent study by the Financial Services Authority (FSA) found that millions of borrowers who took out interest-only mortgages at this time may never be able to repay them.

Monthly repayments on an interest-only mortgage are cheaper than on other types of mortgage because the borrower pays back only the interest on the loan.

The FSA found that three quarters of borrowers had no savings plan in place to pay off the loan at the end of the term.

The regulator said that this left a £100 billion ‘ticking time bomb’ and many borrowers will be faced with selling their home in order to repay the loan.

Under new rules, homebuyers will only be able to take out an interest-only loan if they can demonstrate to the lender that they have a plan in place to pay it back.

Meanwhile, the Bank of England’s lending figures for October show a small increase in mortgage approvals.

A total of 52,982 deals were approved for house purchases during the month, compared with the previous six-month average of 48,880.

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