From 21 December, the building society will also insist the borrower has at least £150,000 equity in the property to take out a loan on an interest-only basis.
Previously the lender would lend up to 85 per cent LTV on an interest-only basis.
The changes apply to residential, both for new and further borrowing. Buy-to-let lending is unaffected by the changes.
In April, the lender restricted its interest-only offering to just three products. The changes now mean Principality will offer only one interest-only product, a 3.39 per cent three-year discount rate mortgage.
Principality mortgage product manager Chris Johnson says: “We have reviewed our interest-only proposition in line with the mortgage market review and recent changes across the market. We still believe there is a need for interest-only products for specific segments of the market and the changes we have made reflect this view.”
Since the start of the year, lenders have significantly tightened their interest-only criteria. Most have limited their maximum LTV to 50 per cent while other have pulled out of interest-only lending altogether.
The Co-operative Bank was the first to pull out completely from interest-only in May this year and was followed in October by Nationwide. Both brands again argued that their decision had been prompted by a fall in demand with Nationwide stating that it represented less than 3 per cent of the applications that it received.
But between February and May this year, Santander, ING Direct, Leeds Building Society and Coventry Building Society all cut their maximum LTVs from 75 per cent to 50 per cent, while Skipton Building Society cut its maximum LTV from 75 per cent to 60 per cent.
The FSA established as part of the final publication of the Mortgage Market Review that ultimate responsibility for repaying the capital at the end of an interest-only term rested with the borrower, not the lender.
The FSA will publish a thematic review on the issues facing existing interest-only borrowers in early 2013.