Blog: Interest-only mortgages fall further from grace

There is further bad news for interest-only borrowers, with Nationwide and Halifax the latest lenders to cut their maximum LTVs to 75%.

Some, such as RBS and Coventry Building Society, no longer offer interest-only mortgages to first-time buyers, with RBS saying it is "prudent for first-time buyers to build up equity in their property by reducing capital from day one".

This sounds sensible, but even if you took out a repayment mortgage you pay back little capital in the early years. A year or two on an interest-only mortgage until the first-time buyer is in a stronger financial position makes little difference.

RBS worries about first-time buyers at risk of negative equity.

However, with most lenders no longer lending more than 90% LTV, unless prices dip by more than 10%, this isn't an issue.

And first-time buyers who are in the fortunate position of having a 20% deposit won't be able to get an interest-only deal from RBS, even though the likelihood of prices slipping by more than that amount is slim.

Like Halifax and Nationwide, other lenders have reduced maximum LTVs or cut back on acceptable methods of repaying the capital. Relying on bonuses, selling the property or using an inheritance is no longer reasonable, say some lenders.

If things carry on this way, interest-only mortgages could vanish.

Indeed, the FSA seems rattled on this front, recently stating that it isn't against interest-only mortgages and isn't banning them. Yet, the damage could already be done.

If interest-only mortgages completely disappear or become so limited in scope that they are available only to a handful of borrowers, there will be less choice.

Yet, interest-only loans aren't necessarily bad.

For the first-time buyer on a limited income, interest only might be their only hope of getting on the housing ladder.

We can tut and say they should wait until can afford a repayment mortgage, but already the average deposit put down by a first-time buyer is £34,000 while the average age of a first-time buyer with financial assistance from their parents is 31. Without financial assistance it rises to 37.

How long should someone have to wait to buy their first home?

And what about first-time buyers who don't have a repayment vehicle but are due to come into an inheritance that would easily clear the capital? Or those on low incomes now but who won't always be?

We're back to ‘one size fits all'. When it comes to mortgages, it really doesn't.

Melanie Bien is director of Private Finance