According to the latest UK Finance statistics, only 32,000 interest-only loans were advanced in 2021, constituting less than three per cent of total lending.
At the end of 2021 there were 754,000 pure interest-only mortgages outstanding in the UK, and 252,000 on part interest-only, part repayment terms. This is a drop of 17 and nine per cent respectively since the end of 2020.
Redemptions also continued to grow with 1.1 million interest-only loans maturing on or ahead of schedule between 2012 and 2021.
The report said that most do repay shortly after, or within six months of maturity, and that only a “small number need longer or require tailored assistance”.
It added that the products that are set to mature over the next two years are only a third of the number in 2012, and those expected to expire in the next 10 years have also fallen by a third.
The report also found that the average loan to value (LTV) for interest-only mortgages has fallen, which mitigates the risk to borrowers and lenders should repayment be a problem.
There are 51,000 pure interest-only mortgages outstanding at over 75 per cent LTV, down 41 per cent year-on-year, and 94 per cent fewer than the 900,000 at these higher LTVs in 2012.
UK Finance added that interest-only mortgages have fallen by around two thirds since 2012, which is when the trade body started collecting data. At the time, there were 3.2 million interest-only mortgages outstanding.
The trade body said that the industry has undertaken a concerted effort to “manage down the size and risk profile” of this area of business.
It pointed to new lending rules implemented by the Financial Conduct Authority in 2014 to curb interest-only lending and lenders undergoing a “collaborative communications programme” to reach out to interest-only customers to discuss repayment plans and ensure they are on-track to repay the loan.
‘Still a place’ for interest-only loans
Leon Diamond, chief executive at LiveMore Capital, said that although the number of new interest-only mortgages only comprised three per cent of total lending at 32,000 loans in 2021 there is “still a place for this type of loan”.
He said: “There are one million interest-only loans outstanding and some borrowers will be unable to repay the capital when their mortgage matures. They are likely to be over 50 years of age and this area of the mortgage market is very underserved.
“People may feel their only option is to sell but they could take out another interest-only mortgage to pay off the first one.”
“As we take into account all of a customer’s income, including pensions, investments and any other assets, many people will find they are eligible for a mortgage after all,” he noted.
