Co-op withdraws interest-only loans

The Co-operative Bank will only offer mortgages on a capital and repayment basis from next Tuesday, although this will not affect the 60,000 homeowners with average balances of £77,000 who already have interest-only mortgages.

However, these borrowers could struggle to find another interest-only deal as most banks are tightening up lending on such mortgages, which allow borrowers to only pay off the capital when the mortgage term ends, enabling them to maximise their initial borrowing capacity. The Financial Services Authority recently warned an estimated 1.5 million such loans worth about £120bn are due for repayment in the next decade.

The Co-op said house price weakness and uncertainty about the economic climate had resulted in a “rapid” decline in demand for interest-only loans.