HSBC withdraws from interest-only lending market

Following this Sunday, those applying for a residential interest-only mortgage with HSBC would need to hold a HSBC Premier bank account – available only to high-net worth customers.

Clients would need to qualify for the account through savings or investments of at least £50,000 with HSBC in the UK; or an individual annual income of at least £100,000 with a mortgage, investment, life insurance or protection product with HSBC.

The changes were announced on Wednesday, the day of the UK Budget Day, when most eyes were on Chaqncellor George Osborne.

HSBC has followed in the footsteps of Nationwide and the Co-operative Group, who had already pulled out of interest-only lending.

Interest- only mortgages, which were popular during the 1990s, and which peaked at a third of all mortgage sales in 2007 allow borrowers to pay off the capital only when the mortgage term ended.

However, following the credit crunch, they have become harder to find due to the perceived risk of people not paying money back at the end of the term.

Under the UK Financial Services Authority's (FSA) plans for a clamp down on irresponsible lending, interest-only mortgages may be offered in future only where there existed a credible plan to repay the capital.

Traditionally borrowers had turned to a savings or investment vehicle to build up the money to repay the debt at the end of the mortgage's term, with the most popular option being endowments during the  late 1980s and 1990s.

However, with endowment performance falling, the credit boom exploded and lenders did away with checks on whether borrowers had any plan in place to repay their debt. With house prices soaring, millions of interest-only mortgages were given out without any plan in place to repay the debt from 2000 to 2007.

As the financial crisis took hold, lenders cut back the mortgages, with most homebuyers opting for repayment mortgages even as those on existing interest-only deals sat tight without remortgaging as interest rates fell.

The past two years have seen lenders withdraw out of interest-only altogether, and only a few big names were left that lent this way. It was a generally felt in the mortgage industry that the flagship Mortgage Market Review, would ban interest-only or make lending this way all but impossible.