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Co-operative Bank withdraws from interest-only mortgage market

The move follows decisions by a number of banks to introduce tough new rules for interest-only customers.


by Victoria Bischoff on May 02, 2012 at 16:46

Co-operative Bank withdraws from interest-only mortgage market

The Co-operative Bank has become the first big lender to withdraw from the interest-only mortgage market.

The move follows recent decisions by Barclays, Lloyds, RBS, Santander and Nationwide to introduce tough new rules for interest-only customers and restrict who is eligible for this type of mortgage.

Interest-only loans, which do not repay any of the mortgage debt but simply service the interest, became popular during the housing boom as they made it cheaper for people to buy houses. Some buyers using them hoped rising property prices would enable them to build up equity in the properties without making repayments. However, the bursting of the property bubble has made the Financial Services Authority that such borrowing is irresponsible.

Withdrawing from the market

As of 8 May, new Co-op Bank customers will only be able to apply for a mortgage on a capital and repayment basis.

Co-op Bank said that a combination of falling house prices and uncertainty over interest rates had led to a rapid decline in demand for these loans. Currently fewer than 10% of new mortgage customers are opting for interest-only deals, down from nearly 25% in 2007.

When asked why it chose to withdraw from the market completely rather than restrict its lending criteria like other lenders, a spokesperson for Co-operative Bank said its decision is about clarity – ‘we want to be clear with our customers about what we offer’.

The bank, meanwhile, reassured its 60,000 existing interest-only mortgage customers that they will be unaffected by the move. These customers will still be able to switch to any open product for the same amount of borrowing on an interest-only basis when their current deal ends and take their interest-only mortgage with them if they move home.

The changes will also apply to mortgage customers of Co-op owned Britannia and Platform, the specialist lender operating through brokers. 

Will more lenders follow suit?

David Hollingworth of broker London and Country Mortgages said Co-op’s decision opens the door for other mortgage lenders to pull out of the interest-only market as well.

‘We’ve seen some small lenders, such as Manchester Building Society, already withdraw from the market but not the same kind of size as Co-op,’ he said. ‘It offers a different groove for lenders to follow – they won’t have to be the first to break rank.’

Hollingworth adds that Co-op Bank’s move is at least transparent. Other lenders may be ‘leaving the door to the interest-only market ajar’, but by introducing loan to value (LTV) caps as high as 50% and extreme restrictions as to what qualifies as an acceptable repayment vehicle they are making it so difficult to apply that virtually no one is eligible.

‘For most borrowers, a withdrawal and such heavy restrictions have much the same end result,’ he said.

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1 comment so far. Why not have your say?

Dislexic Landlord

May 02, 2012 at 17:59

Ive thought about this for some time and I can agree at this point in time why Banks are thinking this way But things will change again when the houseing market booms again which will happen its only a mattter of time

The info I would like to see is how meany consumers stay with the same bank over the 25 year period ???

I would imagin it would be a small percentage And if this is the case im not sure if it will make sence We all know that the amount of capital that is re payed in the first 7 years is quite small

Looking at my own home owning history ive moved to Four houses since 1988 and ive started a new mortgage every time ?

we will have to see what happens in the long term when this Credit Crunch finishes God knows when but it will Finish LOL

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