Nationwide stops interest-only mortgages - FT.com One of the UK's biggest lenders is to stop offering controversial interest-only mortgages to homeowners in a further sign of banks reining back on lending. Nationwide Building Society will no longer offer the product to new customers from October 11 and is the first big high street lender to exit the market. The loans were commonplace during the housing boom as they allowed borrowers to stretch themselves and buy properties they could not afford, with the belief that rising prices would enable them to pay back the capital at the end of the mortgage term. At the peak of the market in 2007, one in three new loans were sold on an interest-only basis, according to the Financial Services Authority. Banks and building societies have been pulling back from interest-only in recent years to protect themselves from losses in the face of falling property values. Lenders also face tougher rules from the regulator as part of the FSA's clampdown on irresponsible lending. In March, Martin Wheatley, the incoming head of the UK's Financial Conduct Authority, warned of the "ticking timebomb" of interest-only borrowers in their 50s who had no way to repay the capital. Jonathan Harris, director of mortgage broker Anderson Harris, said high street lenders were "running scared, falling over each other to rein back on the loan-to-values and maximum loan sizes they are prepared to advance." Nationwide's decision came as new data showed the cost of an average UK house in September was 1.2 per cent lower than a year ago. Prices fell 0.4 per cent over the month, and were 0.5 per cent lower in the three months to September compared with the previous quarter, according to the Halifax House Price Index. "The overriding impression of the housing market in recent months has been flat but with prices now sliding slightly on a quarterly, as well as a monthly basis, it is fair to say that there is now a slight deterioration in outlook," said Gabby Adler, a property buying agent. UK households are facing a growing squeeze on their incomes, despite the launch of the government's Funding for Lending scheme in July designed to encourage banks to lend more to homeowners. The Bank of England's August banking report, published on Monday, showed the number of new loans to households had not improved and mortgage rates were rising, not falling. Experts said there was little evidence that households had benefited from the new scheme, under which 13 UK banks applied for £60bn in low cost loans from the BoE. Figures from Moneyfacts show that there are only seven more 95 per cent loan-to-value mortgages now compared with the period before the scheme. As many as 400,000 existing borrowers were hit with higher mortgage payments this week after Santander, the UK's second biggest mortgage lender, raised its standard variable rate by 0.5 percentage points to 4.74 per cent on Wednesday. The tightening in lending criteria has created a growing number of so-called mortgage prisoners - borrowers who cannot move home or remortgage. Those on interest-only mortgages, self-employed or with little equity in their home have been the hardest hit. Nationwide's decision to stop interest-only lending will mean there are fewer options for borrowers looking to remortgage. In May, the Co-operative Bank became the first UK lender to exit the market. A spokeswoman for Nationwide said it saw interest-only as a "niche" product, with only 3 per cent of new applicants taking out this type of loan.