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The Co-operative Bank withdraws interest-only mortgages  

From next Tuesday the Co-operative Bank will no longer offer mortgages on an interest-only basis.

Customers will now only be able to take out mortgages on a capital and repayment basis.

This change will not affect existing interest-only mortgage customers.

The bank says interest-only mortgages have proven popular over the years, however a combination of factors including falling house prices and uncertainty about the direction of interest rates have led to a rapid decline in demand for these loans.

Currently less than 10% of new mortgage customers at The Co-operative Bank are taking out mortgages on an interest-only basis – this figure has fallen rapidly over the last five years from almost 25% in 2007.

The lender says it expects the changes being proposed in the Mortgage Market Review 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 to customers on a capital and repayment basis moving forwards.

James Hillon, head of mortgages at The Co-operative Bank, says: “The mortgage market has changed greatly in the last four years and as a responsible lender we closely monitor these developments.  With house prices continuing to stagnate, we’re seeing that buyers are increasingly taking a long term view to home ownership rather than seeing it as a route to watch their money grow quickly as was the case for many in the property boom years from the late 1990s onwards.

“We understand that all our customers have individual requirements and as a responsible lender we remain committed to working with them to find an affordable solution to owning their own home.

“For example we know that many customers historically turned to interest only mortgages as a way of meeting monthly outgoings when on a variable monthly income. For these customers we continue to offer a range of mortgages which enable them to make overpayments as and when they can afford to, then use their overpayments fund to meet repayments in the months where they earn less.”

Existing interest-only mortgage customers are able to switch to any open product for the same amount of borrowing on an interest-only basis when they come to the end of their deal.

In addition they will also be able to take their interest-only mortgage with them should they move home.

The above changes will also apply for mortgages offered through Britannia and residential mortgages offered through Platform, the dedicated intermediary lender for The Co-operative Bank.

In the case of Platform, the majority of its lending is focused on buy-to-let and volumes of mainstream and almost prime interest-only applications are low.  It also believes demand for interest-only loans will continue to fall.  

As a result, the lender says the cost of changes that it would want to make in order to comply with future regulations and meet its high standards as a responsible lender cannot be justified.  It has therefore also taken the decision to withdraw interest-only lending for new residential lending and additional borrowing on residential interest only loans.

Platform will continue to offer interest-only as a payment option for buy-to-let, as the rent on the property is typically used to make monthly repayments and the value of the property is used as the repayment vehicle for the mortgage.

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  • Repayment King 3rd May 2012 at 2:53 pm

    Bobby is also absolutely right. Of course there are many ways an interest only mortgage can be repaid, with an adviser keeping in touch with the client on a regular basis, ensuring that the client is on track.

    Unfortunately, there are many clients who have not left the departure lounge, let alone being on track.

    And that’s the problem which has ruined it for everyone else!

  • Bobby 3rd May 2012 at 2:03 pm

    How many more times Shawn ? If someone has a perfectly wortkable plan to repay their mortgage on an interest only basis why should they refused to be still be able to do so ?

  • Shawn 3rd May 2012 at 11:42 am

    How many times Bobby!?? They can still remortgage! Theyll just have to go onto a repayment mortgage.

    Putting someone onto an interest only mortgage for the sole reason that they couldn’t afford a repayment one is not good advice!!
    Any adviser doing such will be inundated by complaints within the next few years.

  • Bobby 3rd May 2012 at 11:25 am

    ISA, Endowment, Stocks and shares, Savings, Bonuses, lump sum payments, Inheritances, down sizing, pension pot shall I go on ?

  • Repayment King 3rd May 2012 at 10:32 am

    Yes Bobby – but how is a big chunk of these “millions” going to pay off their mortgage? We cannot rely on inflation alone.

  • bobby 3rd May 2012 at 9:47 am

    The important thing missed is this is another lender who has slammed the door in the face of millions of people who want want to re mortgage at some time in the future.

  • We're all doomed!! 3rd May 2012 at 9:37 am

    Couldn’t agree more with Geoff Greenwood.

    It has nothing to do with the fact that BTLs are unregulated – in fact, the FSAs stance on regulated firms dealing with unregulated products is that they should apply the principals of regulated business to unregulated anyway!

    Now, this might sound like a sledgehammer to crack a walnut – but if clients end up having to sell their 2 up 2 down in order to pay off their mortgage, then what are they going to do? – Live in a tent?

    That said, we all know that there are many good reasons why interest only can be an appropriate method of funding a residential mortgage – but we all know that it has been overdone in the past – hence the problems we are faced with now.

  • T P 2nd May 2012 at 3:53 pm

    What a disingenuous reason for refusing interest only business ! Fewer than 10% of people buying a new car choose a Ferrari, and some of those over-stretch themselves. Doesn’t mean the product should be taken off the market. Another analogy : Offset and repayment; bit like hitching a trailor full of petrol cans on the back of your Ferrari. I don’t blame the lenders; they are obviously running scared of our beloved regulator (who I really really really REALLY begrudge their ludicrous salaries).

  • Tom Cleary 2nd May 2012 at 2:46 pm

    Hang on guys, this also includes Platform. Not good news at all…

  • Geoff Greenwood 2nd May 2012 at 2:16 pm

    Mike – i can only hope you do not offer advice on BTL as your comments fail to understand what BTL is all about.

    The nature of BTL lending is very different to residential and therefore the risks are not the same. IO on BTL is legitimate and responsible and reflects the fact that the property is an investment, which will be realised at some point (eg by selling the property). The same cannot be said for owner occupied lending. Few people really want to sell their home in reality in order to pay back their IO loan. This is the issue lenders are dealing with now.

    Don’t mind you having an opinion, but at least make it an informed one.

  • Mike Snorkins 2nd May 2012 at 2:05 pm

    I love this bit:Platform will continue to offer interest-only as a payment option for buy-to-let, as the rent on the property is typically used to make monthly repayments and the value of the property is used as the repayment vehicle for the mortgage.

    How does that explanation justify the continuation of IO with BTL mortgages? Could it be that BTL’s are unregulated… or, is it so-called ‘responsible lending’ with all the ‘holier-than-thou’ crap that’s been spouted by lenders recently.

  • Ancient Wisdom...is a mortgage broker in N3 2nd May 2012 at 12:14 pm

    …expected coming from the expected.

    New borrowers will suffer and houseprices will fall as fewer people can afford mortgages.

    Brokers can expect more enquiries on the back of consumers wanting interest only…

  • NB 2nd May 2012 at 12:13 pm

    I realise that the FSA are full of good intent but trying to put the ‘interest only’ genie back in the bottle, but it will only stifle the economic recovery and the fact that all the banks are now back-tracking, in my view more than they need to, in fear of the FSA seems ridiculas to me.
    Come on guys the public are not children, they do not need to be saved from themselves – the more you restrict underwriting policy the worse you will make things!!

  • Ancient Wisdom...is a mortgage broker in N3 2nd May 2012 at 12:11 pm

    Great news – as mortgage brokers will now receive more enquiries for applicants requesting Interest Only.

    Awful News – Borrowers who genuinely could qualify for Interest only in a manageable way.

    More lenders will follow suit – and watch property prices collapse therafter due to unaffordable mortgages when BBR hits 4% in 2015

  • Roger Travis 2nd May 2012 at 12:10 pm

    why hide behind the statement – “demand for Interest only is low”? Just admit you don’t want the Interest Only business.