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71% fall in number of interest-only mortgages outstanding since 2012

The stock of outstanding interest-only mortgages fell by 8% in 2022, compared with the end of 2021, UK Finance said.

Vicky Shaw
Monday 19 June 2023 12:18 BST
The number of interest-only mortgages outstanding has fallen by 71% since 2012, helping to shrink the overall risk of interest-only borrowers being unable to repay deals, according to UK Finance (Joe Giddens/PA)
The number of interest-only mortgages outstanding has fallen by 71% since 2012, helping to shrink the overall risk of interest-only borrowers being unable to repay deals, according to UK Finance (Joe Giddens/PA) (PA Archive)

The number of interest-only mortgages outstanding has fallen by 71% since 2012, helping to shrink the overall risk of interest-only borrowers being unable to repay deals, according to figures from a trade association.

UK Finance said the stock of outstanding interest-only mortgages fell by 8% in 2022, compared with the end of 2021, as customers continued to repay their loans on or ahead of schedule.

As a result of an industry strategy to manage down the size and risk profile of the interest-only book, there were 924,000 interest-only mortgages outstanding last year, compared with 3.2 million in 2012, when UK Finance first started collecting the data.

Within the latest total, there were 702,000 “pure” interest-only home-owner mortgages and 222,000 partial interest-only mortgages.

Interest-only mortgages were particularly popular in the 1980s and 1990s.

They allow people to pay only the interest on the loan in their monthly payments.

But borrowers need to have a suitable plan in place for how they will repay the original amount borrowed when the mortgage eventually ends and they cannot just pin their hopes on house prices rising.

A series of shocks to pension and endowment funds through the 1990s and 2000s shone a spotlight on the repayment risk inherent in interest-only lending, UK Finance said.

It added that, while lenders have always sought to establish at the point of sale that customers borrowing on interest-only terms have valid repayment plans in place, unforeseen events can occur which hinder borrowers’ capacity to repay the capital at the end of term.

Since 2014, a continuous communications programme has been in place, involving lenders contacting their interest-only customers to discuss their plans and make sure they are on track to repay.

The rate of reduction in future years will depend in large part on the maturity schedule of the remaining stock of mortgages, UK Finance said.

It added that its internal data indicate that interest-only loans maturing last year followed the same pattern it has seen over the past 10 years, with the vast majority redeeming in full on, or shortly after, their scheduled end date.

UK Finance said the industry continues to work with a small minority who are unable to do so to find a sustainable way for customers to repay over time.

The small number of borrowers who do not repay immediately upon maturity remains very low, and data indicate the vast majority of these do in fact repay in full over the first few months following the end of term

Charles Roe, UK Finance

Charles Roe, director of mortgages at UK Finance, said: “Even as cost-of-living and rate pressures built through 2022, interest-only mortgage customers continued to repay their loans, many well ahead of the scheduled maturity date.

“In total the interest-only stock, which numbered over three million mortgages 10 years ago,  is now a little over one quarter of that size.

“Lenders continue to refine their targeted programmes to reach out to their interest-only customers, yielding positive results in ensuring borrowers are on track to repay.

“The small number of borrowers who do not repay immediately upon maturity remains very low, and data indicate the vast majority of these do in fact repay in full over the first few months following the end of term.

“As always, any customers worried about repaying their mortgage should contact their lenders early, who stand ready to help with a range of options to repay.”

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