A crackdown on interest-only mortgages will force homeowners to put down bigger deposits and restrict how much they can  borrow.

Advice: For help with Mis Sold Mortgages and Buy to Let or Sub Prime Mortgage Compensation please call 0800 043 1683.

Under pressure: Interest-only mortgage borrowers must raise bigger deposits and will be allowed to take on less debt

Banks are tightening up the rules on interest-only loans - where borrowers repay the interest on a loan and none of the  capital - and many lenders have stopped offering them.

The tougher stance comes after the boom years when lenders stopped checking whether borrowers had any plans to repay their  debt other than through the rising value of their home.

And banks' cautious policies in recent times are likely to herald an even more stringent approach, as the Financial Services  Authority's mortgage market review is seeking to impose much tougher rules on interest-only borrowers.

Since the credit crunch, nine banks and building societies have stopped completely, including Scottish Widows Bank and  Yorkshire Bank.

Interest-only mortgages became popular in the last decade with those struggling to buy their first home or stretching to a  larger property.

Interest-only deals can reduce your monthly payments by almost a third compared to a repayment mortgage. For instance, a £  150,000 repayment mortgage over 25 years at 5% will cost you £887 a month, while an interest-only loan would cost only £625.

Darren Cook of Moneyfacts says: 'Historically, you could only qualify for an interest-only mortgage if you could prove that  you contributed to another form of investment as a means to repay the capital.

This requirement was shelved by the regulators some time ago.

'It can be argued that a long-term interest - only arrangement goes against the principles of responsible lending. With an  interest-only mortgage, there is no room to manoeuvre if the borrower gets into temporary financial difficulty.'

Northern Rock has become the latest lender to bring in restrictions for interest-only borrowers. It will only consider giving  you an interest- only loan if you own at least 25% of your home.

In addition you have to say how you will repay the capital but it will no longer allow you to rely on an inheritance,  dividends from shares, regular overpayments, bonuses or s imply say you intend to convert to a repayment mortgage at a later  date.

Some householders rely on the sale of their home to repay the outstanding loan, with Northern Rock you need a minimum of  £150,000 in equity in your home and that must be at least 40% of its total value - meaning your property must be worth at  least £375,000.

Government-backed bank Lloyds Banking Group, will no longer offer interest-only mortgages on loans above £500,000.

At the same time, Lloyds, which also sells mortgages through Halifax and Cheltenham & Gloucester, will charge an extra 0.2  percentage points on its standard rates for loans over 75% of your home's value.

It too is becoming stricter about ways you can repay the capital - relying on the sale of your home, a business, other assets  or an inheritance are banned.

Nationwide will allow you to state that you will clear your mortgage when you sell your home provided you don't borrow more  than 66% of its value and have at least £150,000 equity.

Mark Harris of brokers Savills Private Finance says: 'This is the beginning of the end of easy interest-only mortgages. I  think we'll see a move towards short-term interest-only mortgages which will convert to a repayment loan after a set time.'

How the interest-only problem grew?

The rise of interest-only mortgages, as house prices boomed from 2002 to 2007, from 13% of those taken out to 33%.

The FSA report highlights that 'the vast majority had no repayment vehicle specified'.

That came as the popularity of endowments waned and people found it harder and harder to get on the property ladder as prices  soared. Never mind though, the theory went, the property will be worth much more by the time we sell.

And while there is an obvious amount of personal responsibility here, it wasn't just borrowers to blame. Banks and building  societies essentially completely gave up on checking whether anyone had any plan to repay their debt, while continuing to  lend them as much as possible. Remember the stories of eight times salary mortgages - well you can guarantee plenty of those  were interest-only.

The slashing of the base rate down to 0.5% and the bounce back from the property slump over the past year has masked the  problem. Many of those who borrowed large amounts on an interest-only basis have seen mortgage payments fall sharply, just as  they were at risk of going under, and their property values start rising again. But rates can't stay this low forever and  many of those borrowers still have started to pay any of their debt back.

Essentially, this shows a large number of people with no idea, beyond hoping house prices will rise, how they will ever clear  their mortgage. When house prices stop rising that becomes a problem - but that couldn't happen in the UK could it?

Source:This is Money