Number of interest-only mortgages continues to fall

Over a million pure interest-only mortgages were outstanding at the end of last year, 8.9% fewer than the previous year. With a further 54,000 interest-only loans due to mature this year, the total number of borrowers with this type of mortgage continues to fall8 .

Interest-only mortgages were very popular in the late 1980s and 1990s when interest rates were hitting highs of 14%. This type of mortgage allowed borrowers to defer capital repayments and just pay interest each month. In many cases, they were linked to a separate repayment vehicle such as an endowment policy, projected (but not always guaranteed) to pay out the full amount needed, provided that premium payments were kept up until the matching policy and mortgage term ended.

Repaying the capital

Lenders require proof of how the borrower intends to repay the mortgage at the end of the term. Popular repayment methods include selling your property and downsizing, selling investments and using savings. It’s the lender’s responsibility to ensure they are maintaining a credible repayment plan to repay the original loan. Lenders are much more cautious about approving residential interest-only mortgages these days.

8 UK Finance, 2020