From 3 December, the lender will only offer interest-only mortgages for buy-to-let loans.
Existing borrowers on interest-only will not be able to increase their borrowing on an interest-only basis but they will be able to port their existing mortgage.
Coventry sales and marketing director Colin Franklin says: “Residential interest-only mortgages have declined to less than 2 per cent of all residential mortgage applications. We have therefore decided the time is right to leave this market.”
This week NatWest and Royal Bank of Scotland announced they were pulling out of the interest-only market for new lending.
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.
Nationwide revealed it was pulling out of interest-only in October this year – it also took the line that interest-only has become a niche product, representing less than 3 per cent of the applications that it received.
But in this month’s issue of Mortgage Strategy’s Lending Zone, Nationwide spokesman Steve Blore also revealed that changes to the way lenders assess whether a borrower qualifies for an interest-only loan under the MMR also made it unattractive.
He said: “We could see there could potentially be an issue if there was a burden on the lender to check that repayment vehicles were suitable as we would in effect have to create a team to do it.”
The reason interest-only declined to very low levels is that lenders over-reacted in the consultation period leading up to MMR and made it gradually more impossible to get. When MMR was actually published it was not particularly critical of interest-only and basically said that for the right person and with a credible repayment strategy it was perfectly fine. Nationwide’s interpretation is rubbish. Yes, the lender has to check the repayment vehicle but MMR clearly states that responsibility for having a reasonable repayment plan is with the borrower.
So what happens now is that a perfectly good mortgage arrangement falls by the wayside because lenders incorrectly anticipated MMR to the extent that they choked off their own business. You couldn’t make this stuff up really!