With the average UK mortgage at £109,000 and average borrowing costs at 3.5%, switching from repayment to interest-only saves households roughly £230 a month, according to the Telegraph.
However, concerns have been raised about how the debts will be repaid and the trend also runs against the FSA’s advice. It has threatened to “constrain future interest-only lending”, branding much of it unsustainable.
The FSA disclosed to the Telegraph that, between the onset of the financial crisis in the third quarter of 2007 and the final three months of last year, the value of interest-only mortgages increased by £99bn and the number of borrowers by 369,370.
Some of those will have been new deals, but the FSA confirmed the bulk were due to “forbearance” – as banks move homeowners on to more affordable payment plans to avoid defaults.
Its data shows around two-thirds of the increase came from struggling households.
Over the three years, the proportion of loans classified as interest-only rose from 40.04% to 42.95% but the proportion of interest-only deals available fell from 49.51% to 31.41% as banks cut the supply of higher risk products.