A spokesperson for the lender said: “Nationwide has seen a sharp decline in lending on interest-only products in recent times and currently only 3% of our new lending is interest-only.

“This will not affect any existing customers as those already on interest-only will be able to continue on an interest-only basis, only existing borrowers seeking to increase their loan will be moved onto a repayment product.”

Interest- only mortgages allow borrowers to pay off the capital only after the mortgage term ends. They have declined in popularity since the credit crunch as they are now thought of as at a high risk of people not being able to pay back the money at the end of the term.

Under the FSA’s plans to clamp down on irresponsible lending, interest-only mortgages will be offered in future only where there is a credible plan to repay the capital, so borrowers will no longer be able to take these mortgages out in the hopes of house prices going down.

Clare Francis, mortgage expert 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.

“There is nothing wrong with an interest only mortgage, as long as the borrower knows how they will repay the capital once the mortgage term ends, and a payment plan is put in place.

“That said, there are fears that some of those with interest only mortgages do not have an adequate repayment plan in place which could cause major problems when their mortgage term ends.

“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.”

Francis says that the clampdown on interest only mortgages unlikely to have a major impact on the housing market in the near term, as the vast majority of people opt for repayment mortgages.

A repayment mortgage gives a guarantee that your debt will be paid off by the end of the term, and is thought of as a simpler mortgage.

Francis added: “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. Anyone worried about this should speak to an independent mortgage broker for advice.”