The Nationwide Building Society has become the latest lender to tighten lending criteria on interest-only mortgages, which are estimated to account for around 40 per cent of mortgages in Britain.
The building society currently offers interest-only mortgages to residential customers with 25 per cent equity in their property.
From tomorrow, only customers with 50 per cent equity will be eligible for this type of mortgage, which allows repayments to be made on interest-only basis.
The change affects other companies in the Nationwide group, including the Cheshire, Derbyshire and Dunfermline Building Societies.
Other lenders, including Santander, have already introduced similar rules for interest-only mortgages.
Martyn Dyson, Nationwide’s head of mortgages, said: “A number of major lenders have recently restricted their criteria for interest-only mortgages and Nationwide needs to be able to manage application levels in a prudent and sustainable manner.”
The decision means that borrowers with a deposit of less than 50 per cent will have to take out a repayment mortgage.
Monthly payments are higher on a repayment mortgage, as the borrower has to pay off some of the capital, as well as the interest.
The danger with interest-only mortgages is that unless the borrower has wisely invested the money they save each month, they may be unable to pay off the debt at the end of the mortgage term.
Lenders are therefore starting to ask for evidence that a customer has a specific investment which will allow them to pay off their loan, before approving applications for interest-only mortgages.
In related news, the latest figures from the Council of Mortgage Lenders show that gross mortgage lending increased to an estimated £10.7m last month, a 14 per cent increase from February 2011, but only slightly higher than January 2012’s gross lending total of £10.65 billion.
February was the seventh consecutive month of higher year on year mortgage lending.