Banking: Interest-only mortgage crisis looms

Lenders are facing a massive £116bn in unpaid interest on mortgages which are due to mature by 2020, according to xit2, a leading asset valuer.

Up to 1.3 million interest-only mortgages were written at the height of the credit boom, often as a way to get first-time buyers or those with poor credit histories on to the property ladder.

However, it is estimated that 1.04 million of these mortgages do not have a final repayment plan in place, meaning the borrower will come to the end of their mortgage term still owing the full capital sum. This could create a major headache for borrowers and banks alike.

Mark Blackwell, the managing director of xit2, said: "The big block of outstanding balances which are due to mature over the next eight years is a legacy of unsustainably high interest-only lending prior to the financial crisis.

"If lenders fail to help these borrowers find a repayment vehicle, it will come back and give them a nasty bite. Plenty of those will be families on tight monthly budgets, with low household earnings and little to no life savings."

Many of these borrowers will also face negative equity. Steve Lowe, director at the equity release mortgage specialist Just Retirement, said: "This is something we and the debt charities are increasingly becoming aware of. Many of these people are approaching retirement, so their options for repayment are narrowed."