Fears grow for sector as Co-op axes interest-only

There are fears that more lenders will pull their interest-only offerings in a knee-jerk reaction to the Mortgage Market Review, following The Co-operative Bank’s decision to stop new interest-only lending.

From tomorrow, customers will only be able to take out mortgages on a capital and repayment basis. Its intermediary lender Platform will also no longer allow interest-only on its residential range, but will allow it for buy-to-let deals.

Co-op Bank has blamed a lack of demand and the Financial Service Authority’s MMR for its decision, despite the regulator saying it is not its intention to ban interest-only.

The bank says it expects the changes being proposed in the MMR will result in all customers who apply for a mortgage being assessed on the basis that they can afford a capital and repayment loan, which is why it has made the decision to only lend on such a basis.

Dominic Hennessy, owner of Just Us Mortgages, says interest-only is dying a death by a thousand cuts and it’s only a matter of time before other lenders follow in the footsteps of The Co-operative Bank.

He says “Lenders are massively risk-averse right now. This is the latest example of that fear translating into reduced mortgage availability for borrowers.

“If demand for interest-only is down slightly, it’s because people read the headlines and think it’s no longer available.”

Clare Francis, head of content at MoneySupermarket.com, says: “This change is largely in response to the MMR and it wouldn’t be surprising to see more lenders follow suit.

“There is nothing wrong with an interest-only mortgage per se, as long as the borrower knows how they will repay the capital once the mortgage term ends.”

When Co-op Bank’s existing interest-only customers come to the end of their deal they can switch to another interest-only product for the same amount of borrowing. They will also be able to take their interest-only mortgage with them if they move home.