Northern Rock is the latest lender to clamp down on interest-only lending, with others expected to follow suit.
It has reduced the maximum loan to value for interest-only mortgages from 85 to 75 per cent and restricted the repayment vehicles it accepts.
This follows similar moves by Lloyds Banking Group, Santander, Woolwich and Coventry Building Society and comes after the FSA proposed tighter controls over interest-only affordability checking in its mortgage market review.
Northern Rock says it will no longer accept inheritance, dividends, regular overpayment, bonuses or the intention to convert to repayment at a future date as repayment strategies. It will not accept the sale of property as repayment for loans of more than 60 per cent LTV or where the borrower has less than £150,000 equity in the property.
Earlier this month, Lloyds capped the amount that can be borrowed on an interest-only basis at £500,000 and will no longer permit the sale of a main residence, business or inheritance as a repayment option. Santander no longer lends on an interest-only basis above 75 per cent LTV.
A Northern Rock spokesman says: “We have got to consider affordability and ensure customers have a suitable vehicle to repay the loan.”
Grant Pollock, a financial planner at Johnston Financial, says he thinks banks will continue to tighten their policies and that he agrees with this in the interest of affordability.
He says: “There will always be certain situations where I would like to see lenders sit down and look at individual cases. But in the past, people have borrowed money on an interest-only basis just to make it more affordable without having an easy payment vehicle in place and that is not a good position to be in.”
The Mortgage Alliance head Phil Whitehouse says it is inevitable that other companies will follow now that lenders such as these have tightened policy. He says: “It is inevitable. It makes every other lender of a similar size review its position.”