Britain's biggest lender ends interest only without documentary proof of repayment vehicle

Britain’s biggest mortgage lender has announced the end of interest-only mortgages without documentary evidence of how the loan is going to be repaid.

Halifax requires borrowers to provide written proof of how the loan will be repaid before a mortgage offer is made. Until April 6, it only asked borrowers to say that they had a repayment vehicle in place before the mortgage offer.

It is the latest example of banks and building societies tightening their lending criteria amid growing fears that home owners will default on their loans due to high unemployment.

Halifax allows borrowers to repay interest-only mortgages using endowment policies, Isas, pensions, shares, savings or the sale of a second home.

It means a borrower – who says they will use the money saved in Individual Savings Accounts to repay their home loan – must provide a copy of their latest Isa statement for the last 12 months before they can receive an offer from the lender.

High-street lenders have been tightening their interest-only criteria since the downturn because they regard these loans as more risky than repayment deals. If this continues, interest-only mortgages could vanish, or become so limited in scope that they are available to only a handful of borrowers.

Interest-only loans aren't inherently bad. What about first-time buyers who don't have a repayment vehicle but are due an inheritance? Or someone with a modest income but sizeable and regular bonuses which can comfortably be used to clear the capital?

‘One size fits all’ does not work when it comes to mortgages. For some borrowers, not all, interest only is the right choice.

Lloyds TSB introduced the change earlier this year and has since scrapped the higher rate it used to charge for interest-only mortgages.Other lenders have also tightened their policies on interest-only mortgages this year, with RBS and Coventry Building Society no longer offering this type of deal to first-time buyers.

RBS said: “It is prudent for first-time buyers to build up equity in their property by reducing the capital from day one.”

A Halifax spokesman said the changes were "designed to reflect the additional risks and responsibilities associated with interest only lending.”