NatWest became the latest major lender to stop offering interest- only mortgages this week, and was swiftly followed by the Coventry Building Society.
NatWest, owned by RBS, said fewer than one in 20 customers asked about interest-only which had made it a niche product, while the Coventry reported even smaller demand. Nationwide pulled out earlier this year, while Santander cut back the amount it was prepared to lend to just 50 per cent of the value of a property, although it has subsequently raised that to 75 per cent.
The loans were hugely popular in the rising property market of the early 2000s and accounted for a third of all new mortgage borrowing in 2007, just before the property market collapse.
The Financial Services Authority this year called for interest-only to be offered only where there is a credible plan to repay the capital, rather than borrowers simply relying on their home increasing in value.
Mark Harris, chief executive of mortgage broker SPF Private Clients, said: "Interest-only is suitable and appropriate for a certain type of borrower. It is not suitable for everyone and in retrospect at the height of the market interest-only mortgages were dished out rather too freely.
"But it is a shame that lenders follow each other like sheep and are all reining in their interest-only lending," he added. "The market desperately needs innovation to help people afford to move and buy properties."