Lloyds Banking Group is no longer offering borrowers an interest-only repayment method if they are borrowing more than £500,000 as part of wider changes it is making to its interest only proposition.
The lender is also requesting that borrowers offer some proof of a repayment method.
But it will no longer accept a sale of the house or business, or inheritance as acceptable.
Instead it wants borrowers to have a suitable repayment vehicle in place, for example a pension or insurance policy.
Nigel Stockton, sales director of mortgages at Lloyds Banking Group, says: “Interest-only has significantly grown in popularity. That does not mean that it’s a greater risk but means it’s the right time to review it. We have to be sure that our products reflect the additional responsibility of having an interest-only mortgage both to borrowers and us.”
Stockton adds that the group has had little experience of borrowers defaulting on interest-only mortgages but there is still a risk there that repayments will not be met.
He adds: “Taking a loan above £500,000 is a significant commitment, and it stands to reason that any potential shortfall would be a substantial amount.
“Allowing this amount of borrowing exclusively on a repayment basis is the only way that we can provide the protection both to the borrower and the lender that the capital amount can be repaid at the end of the term.”
The new measures will come in place today for brokers and in branches next week.
The lender will also be writing to existing interest-only customers in the coming weeks to encourage them to review their repayment model.
Halifax for Intermediaries hiked its rates on its tracker and fixed rate mortgages for interest-only payments earlier in the year.