Existing customers will be able to keep their current interest-only mortgage, port it or switch to a new deal without losing the facility.
A spokesperson from Nationwide said: “Interest-only is a dwindling market, it amounts to less that 3% of our new borrowing and so because numbers are getting so small we decided in the interests of our wider market to stop offering interest only.
The decision will take effect from 11th October and customers are still able to reserve products up until then.
Andrew Montlake, director of London-based broker Coreco, said: “This is a massive step for Nationwide to take and it could well have a big effect on other lenders who have been monitoring this sector of the market closely.
“Whilst we can sympathise with the reasons behind such a move, I cannot help thinking that this is an over-reaction to a shrinking section of the market where sensible changes have already taken place.
Montlake added: “Whether this is the final nail in the coffin for mainstream interest only mortgages remains to be seen although I do not think we will see the end of it totally.
“As with anything, when faced with potential new regulation or post-crises there is often an over-reaction and the pendulum swings too far in the other direction before settling back to a sensible middle ground.
And Ben Thompson, managing director of Legal & General Mortgage Club, said: "This will come as a surprise but probably not as a shock. The number of mortgages taken out on an interest only basis over the last year or so has been dropping significantly and therefore a decision like this now whilst frustrating for some, won't impact as badly as it would have done if pulled over a year ago.
And he added: “What's most interesting is what happens next. Some will no doubt follow this move as they won't want to be selected against for interest only however others will see this as an opportunity.
“It is clear that for the lenders that are prepared to take the necessary steps and checks required to assess the genuine plausibility of interest only repayment plans, this represents an opportunity. “There has for some time been a view that interest only would end up as some sort of niche, with a lengthier process and more regular checks in place, and a slightly loaded pay rate. It looks as though we might well have just seen the catalyst for this change."
Lee Karasavvas, director of the independent mortgage broker Prolific Mortgage Finance, 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. In reality, Nationwide's decision came as no surprise at all.
"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.
"The demise of interest-only reflects the ongoing nervousness among UK lenders. For borrowers who receive bonuses, or who have other sources of income or capital, interest-only brings the all-important flexibility that they need.
"Expect a raft of other lenders to follow in Nationwide's footsteps in the weeks and months ahead. Interest-only is destined to become a niche product offered by a small collection of private banks."