Interest-only mortgages, which were popular before the financial crisis, allow borrowers to make monthly repayments which cover just the interest on the loan, not the amount borrowed.
It means monthly repayments are cheaper, but the borrower is unable to make a dent in the actual debt itself.
Following a review of the market, lenders put in place much stricter rules around who could borrow interest-only mortgages. For those who did take them out, sustainable plans had to be put in place for eventually repaying the home loan.
Loans maturing before 2020
More recently, an industry-wide commitment was made by regulated mortgage lenders to contact all borrowers on interest-only loans due to mature before the end of 2020 to ensure they were either on track to repay their loans or find another solution.
This could include switching to a full repayment mortgage or paying back their loan in full ahead of schedule.
In 2012 the total number of interest-only mortgages being repaid by borrowers was 2.5 million, this plunged to 1.23 million in 2018, according to UK Finance, the body representing the mortgage industry.
The number of borrowers with interest-only loans maturing at the end of 2020 has also fallen by nearly half.
Jackie Bennett, director of mortgages at UK Finance, said the drop in numbers represented an ‘industry success story’ for lenders.
She also revealed many borrowers who were on interest-only mortgages had large equity stakes in their property, something which meant they would have more choice of repayment options when they needed them.
Advice to interest-only borrowers
Bennett added: “We would encourage interest-only customers to follow the advice in our consumer leaflet and contact their lender as soon as possible, to discuss the potential solutions available to them.”
UK Finance’s leaflet is aimed at raising awareness of the various options available to interest-only borrowers. You can take a look by clicking on this link.
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