New figures have revealed that the number of outstanding interest-only mortgage loans has fallen below two million.
According to data from the Council of Mortgage Lenders, the interest-only stock has fallen to 1.9 million loans, accounting for 21% of all home-owner mortgages.
This means the number of outstanding interest-only loans has fallen by 41% since 2012 – down from 3.2 million.
The CML said that while new interest-only lending still takes place it is very much constrained by the affordability framework introduced with the Mortgage Market Review.
Less than 2% of new house purchase loans are now taken out on an interest-only basis, compared to a peak of nearly 40% in 2007.
An interest only mortgage is when the monthly mortgage payment only covers the interest owed. Hundreds of thousands of borrowers who took out a loan now face having to pay it back.
They were once the norm in the UK and many were taken out with little thought to how they would be repaid.
CML analytics manager James Tatch said: “While our data does not give a precise one-to-one linkage between successful borrower contacts and good outcomes, it does point strongly towards that being so, and discussions within the industry support this, In other words, where lenders employ well-targeted strategies for contact and case management, we are better able to ensure borrowers have appropriate means to repay.
“With five years’ worth of data showing steady improvement, you could make a decent case for now calling this success. But, with 1.9 million interest-only loans still remaining, we would rather say ‘so far, so good’.
“And with a third of the interest-only book not due to mature until the 2030s, it is crucial we continue our commitment to managing developments to deliver the same positive outcomes, so we report the same sort of progress every year.”
The Financial Conduct Authority has launched a review into how firms are treating borrowers whose interest-only mortgages are approaching maturity.
The FCA estimates that 600,000 interest-only borrowers will see their mortgages mature before 2020. Of these customers, just under half are expected to have a shortfall, with around a third of these shortfalls expected to be over £50,000.
Currently, the options open to people over 55 reaching the end of an interest-only mortgage with a shortfall are limited as they are often restricted by their age – too old for further borrowing, but too young for equity release.
Many of these people will either have to resort to selling, downsizing, or turning to savings or pension pots. This is despite the fact that many have good incomes and can continue to service a mortgage.
According to research by over-60s property experts Homewise, one in 10 over-55s UK homeowners are still paying interest-only mortgages and face the prospect of clearing their debt when the deal runs out.
While the majority are confident of clearing the debt, substantial numbers fear they will not be able to. The study shows 17% of interest-only borrowers aged 55-plus – equivalent to 24,300 – admit they will be unable to clear the debt.
The average amount owed by over-55s with interest-only mortgages is around £91,000, with one in seven owing more than £150,000.
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