Bradford & Bingley Building Society urged other banks and societies to follow suit.
Societies are finding that offering deep discounts in the first year of up to 6 per cent - enabling customers to enjoy a virtual "freebie" for 12 months - has proved a double-edged sword.
When the housing market was still struggling to recover last year, a 5 per cent discount on the first year of a pounds 75,000 mortgage, cutting repayments to just pounds 100 per month, made sense.
But now more people are moving house, the costs of discounts and cash backs of up to pounds 9,000 are proving too expensive for societies. The Bank of England also believes that these up-front inducements have a dangerous sting in the tail. When a 5 per cent discount ends on a pounds 75,000 mortgage, payments in the second year almost triple to nearly pounds 300 per month. The Bank believes many customers will be unprepared for the jump in payments and repossessions will follow.
Bradford & Bingley says it is following advice from the Bank of England, which warned on Thursday that lenders were falling into "some of the traps of the past" by not checking sufficiently that borrowers could afford repayments.
The housing market is showing the best growth since the collapse of the 1980s boom, with prices rising by around 5 per cent a year. Mortgage lending by major British banks rose 21 per cent to pounds 2.3bn in May as a result of an increase in house sales, the British Bankers' Association said.
John Wrigglesworth, director of strategy and communications at the Bradford & Bingley, said the society scrapped its first year discounts because "we felt we had to take a lead. These discounts are luring customers into a false sense of security. They get a freebie in the first year and then get whacked in the second year. If general interest rates go up as well, they will be really stuffed."
Mr Wrigglesworth expects other building societies like the Nationwide and the Yorkshire to follow suit. He says societies should offer discounts spread over three to five years.
Analyst Rod Thomas of UBS expects the mortgage market to polarise between societies, which will offer cheaper rates to all their borrowers, and the banks, which will continue to offer inducements to first time buyers while charging existing borrowers more.
Deals in danger
First year mortgage deals under threat:
t Woolwich - discount of 5.41 per cent up to 80 per cent of price for first-time buyers.
t Abbey National - 2 per cent off on variable rate plus 3 per cent cash back.
t Bristol & West - 0.95 per cent rate until 30 June 1997 on loans up to 90 per cent of price.
t Hinckley & Rugby - nothing for nine months then standard variable rate.
t Principality - 1 per cent until next July on loans up to 90 per cent of price.
t Scarborough - 0.75 per cent for first year for loans up to 70 per cent.Reuse content