Santander sounds death knell for interest-only mortgages

The UK's second-biggest mortgage lender has doubled the deposit for an interest-only loan.

Spanish-owned Santander has increased the deposit an interest-only borrower must find from 25 per cent of the value of a property to 50 per cent.

The move effectively sounds the death-knell for interest-only mortgages which, just five years ago, accounted for 20 per cent of all first-time buyer deals. Last year, the proportion fell to just 3 per cent as the City regulator – the Financial Services Authority – warned of the risks attached and lenders cut back on granting the loans.

David Hollingworth, associate director at London & Country Mortgages, said: "Such a radical shift by a major lender will be seen by many as another nail in the coffin of interest only."

The move will encourage rival lenders to follow, experts said, which could hit hopes of a housing market recovery.

Mark Harris, chief executive of broker SPF Private Clients, said: "Santander's move could set a precedent, with other lenders following suit.

"But if interest-only becomes beyond the reach of all but the wealthiest of borrowers, then it will hamper the housing market recovery, as there will be less choice for borrowers."

Five years ago it was still possible to get 100 per cent interest-only mortgages. However, anyone who took one out then is now likely to be facing the misery of negative equity – owing more than the property is worth.

Doubling the deposit could leave people unable to get a new deal.

David Black, analyst at Defaqto, said: "Only 29 per cent of mortgages will now permit an interest-only loan and most demand a 25 per cent deposit. The move to a 50 per cent deposit could lead to a significant problem for many interest-only borrowers."

Interest-free mortgages

73,000 Number of first-time buyers who took out interest-only mortgages in 2007.

5,300 Number of first-time buyers who took out interest-only mortgages in 2011.