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Interest-only mortgages halve in six years

Interest-only mortgages halve in six years

Category: Mortgages
Author: Tim Leonard
Date: 21/05/2018

The number of homeowners with interest-only mortgages has almost halved in the past six years, after lenders stepped up their efforts to raise awareness of the controversial loans.

According to UK Finance, there are now 1.7 million interest-only mortgages outstanding, compared with some 3.2 million in 2012, when the data first began to be collected.

With an interest-only mortgage, borrowers are paying off their interest every month, but not the capital, and therefore aren't actually reducing their loan. This means that when the mortgage term comes to an end, the initial loan remains outstanding, with homeowners expected to have plans in place to enable them to pay it off, perhaps using savings or other investments.

Obviously, this will not always be the case, and a review carried out by the financial watchdog in 2013 showed that many of these borrowers had not talked to their lender to figure out a repayment plan, leaving them at risk of losing their homes.

Lenders have since been encouraged to step up their engagement in terms of communicating with customers well before they come to the end of their loan. As a result, all interest-only borrowers with loans scheduled to mature before the end of 2020 should have been contacted to see if they were on track to repay their loans; where there looked to be problems, lenders have had to work with borrowers to rectify the situation.

This communication strategy so far appears to be working; of the one million interest-only loans due to mature by 2020 that were live at the end of 2012, only around 200,000 now remain.

"Many borrowers continue to redeem ahead of schedule or switch to a repayment mortgage," said Jackie Bennett, director of mortgages at UK Finance. "However, there remains plenty more work to do over the coming years to ensure that those remaining borrowers who have so far been reluctant to engage have viable repayment plans in place.

"We continue to encourage all borrowers with interest-only mortgages to contact their lender as soon as possible, as the sooner they do so the more options will be available."

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