Nationwide Building Society has become the latest lender to pull out of interest-only for new customers.

It made its policy change public with an alert to brokers yesterday.

Clare Francis, mortgage spokesperson at MoneySupermarket.com said: “Nationwide’s decision could certainly sound the death knell for interest only mortgages. It’s a big decision for one of the country’s largest lenders to pull out altogether, and if others follow suit, the days of interest only mortgages may be numbered.

“Making this type of loan harder to come by helps reduce the risk of the so-called ‘mortgage time bomb’ exploding, but it may be a step too far for the industry to stop them all together. Most people with interest only mortgages are managing them well yet they’re being penalised for the fact that they were not suitable products for a minority of people.

“Those most affected from the restriction in the availability of interest only loans will be borrowers who already have them. They may find they are unable to remortgage onto another interest only deal. As a result, they will either have to stick with their current mortgage or switch to a repayment loan which will mean an increase in their monthly mortgage payments.”

Lee Karasavvas, director of the mortgage broker Prolific Mortgage Finance, said he believed interest-only was destined to become a niche product offered by a small collection of private banks.

He said: “This is a massive overreaction from the Nationwide. With the withdrawal from the market of such a major lender, the fall from grace of interest-only is complete.

“Interest-only used to be at the core of the mortgage market but it’s now very much on the periphery. It’s ludicrous to suggest interest-only is high risk. If there’s a genuine and viable repayment strategy then it’s no higher risk than any other loan. But tell that to a lender.”