Interest-only home loans' future takes double blow

NatWest and RBS are the latest high street names to withdraw from market

The future of the market in interest-only mortgages, which accounts for nearly one in 10 of all UK home loans, has been thrown into further doubt as the Royal Bank of Scotland and Natwest withdrew their range of products.

The decision by two of the country's biggest high street names to exit interest-only is being seen as a watershed moment for the product.

"The fact that RBS and Natwest have finally given up the ghost on interest-only lending, especially after Nationwide's withdrawal a few weeks ago, could well be a game changer in the fortunes of mainstream interest-only mortgages," Andrew Montlake, a director at mortgage brokers Coreco said.

"It does look increasingly like interest-only is destined to survive only as a niche product or the preserve of the wealthy through the private-banking fraternity."

This was underlined when Coventry building society also withdrew from the market. The Coventry said it was leaving because of the lack of popularity of this type of home loan: "Interest-only mortgages have declined to less than 2 per cent of all residential mortgage applications," said Colin Franklin, Coventry's sales and marketing director. "We have therefore decided the time is right to leave this market."

Only Santander seems to be bucking the trend by upping its interest-only mortgage range.

The sale of interest-only mortgages has long been controversial as during the property boom at the start of the decade the number of these loans soared. By 2006, a third of all new home loans were interest-only but with the subsequent fall in property prices many borrowers find themselves in negative equity.

In addition, because the capital sum is left to be paid on expiry of the mortgage, there has been widespread concerns that many borrowers have no proper investment vehicle in place to repay their debt. In response, regulators have drawn up tough guidelines for the sale of interest-only products.

There is even some alarm within the banking industry that a good proportion of such mortgages taken out during the boom could potentially have been mis-sold and that claims for compensation could come.

Mike Harris, from a brokers SPF Private Clients, reckons the pendulum has swung too far: "Interest-only is not suitable for everyone and in retrospect perhaps at the height of the market they were dished out rather too freely. It is a shame that lenders follow each other like sheep and are all reining in their interest-only lending."

If the market continues to shrink it could be left to private banks and bridging lenders – which have a chequered past – to offer these type of loans.