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FCA Reports That Interest-Only Mortgages Have Halved Since 2015

Journalist: Riz Malik

ended 15. August 2023

Since 2015, there's been a 50% reduction in interest-only mortgages to 750,000 and part-interest-only mortgages to 245,000, according to a new FCA study. This decline can be attributed to more borrowers transitioning to repayment loans or paying off their debts sooner than anticipated.

The majority of the remaining interest-only mortgages are set to mature in 2031 (72,000)  and 2032 (77,000), respectively, with a noteworthy increase in 2027. This offers borrowers who do not have a repayment strategy plenty of time to pay down a portion of their remaining balance before their mortgage expires.

According to an FCA-commissioned study, 78% of borrowers were aware of the need for a repayment plan when they acquired their mortgage.

Furthermore, the study discovered that 82% of borrowers were confident in repaying the remaining principal at the end of the mortgage. However, this optimism may be overstated. Although 36% of borrowers expect a future shortfall, predictions suggest that proportion may be closer to 46%.

  • What steps should borrowers take if they are nearing the end of their interest-only mortgage without a repayment plan?
  • Are you seeing an increase in interest-only borrowing following recent rate hikes?
  • What are the prevalent methods currently used to repay interest-only loans?

Please share your thoughts below.

5 responses from the Newspage community

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Editor
Riz Malik
Independent Financial Adviser at R3 Wealth

We've noticed an increase in clients seeking interest-only borrowing with property sale as their repayment method. If your loan term is nearing its end, it's advisable to tackle any deficiencies sooner rather than later. While discussing with your existing lender is a possibility, it's also beneficial to look into alternative solutions available in the wider market.
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Ranald Mitchell
Director at bad credit mortgage specialists Charwin Mortgages
The optimism is overstated if what we are seeing is anything to go by. We speak to "end of termers" who have made little or no provision to exit their interest-only mortgages despite being repeatedly warned. Many have surrendered their endowments, received compensation, spent the money and made no inroads into the mortgage debt whilst enjoying the low monthly mortgage payments. Typically aged 60+ they feel now is the time to switch to repayment and fail affordability drastically. So what are their choices? Equity Release is an option but with the recent rate rises, coupled with the youngest applicants' age, the net advances available have been reduced significantly, in many cases ruling this out. Retirement Interest Only doesn't seem to work as pensions are not up to scratch so this leaves sale of property, whilst ok in principle, is something that people just don't want to do.
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Justin Moy
Managing Director at EHF Mortgages
We have certainly seen more clients finishing their whole mortgage term without the balance repaid - so looking at options such as Retirement Mortgages and Equity Release for continued borrowing support. Most of those on interest-only have either been self-employed and/or have high levels of equity, so will have planned to sell and downsize at some point in the future, but perhaps not immediately. Mortgage lenders have been very supportive to design specific products just for these situations. Gone are the days of desperately trying to repay your mortgage by 55, trends recently have meant more support for children with their property purchases, taking on additional borrowing, and repayment of existing debt, well into retirement.
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Darryl Dhoffer
Founder at The Mortgage Geezer
In March 2016, The Mortgage Credit Directive (MCD) was Introduced to help borrowers from taking on too much debt when taking out a mortgage. Some of the rules for Interest Only Mortgages changed as well, including minimum income requirements, minimum equity requirements in the property, and the borrower has a repayment strategy in place such as selling the home or using a pension lump sum.
The MCD also restricted the circumstances in which interest roll-up mortgages could be used, which could have led to the borrower owing a significant amount of money at the end of the mortgage term, which they may not be able to afford to repay.
So the fact that Interest Only Mortgages have declined since 2015, is a direct consequence of MCD in 2016, and it's encouraging to know that some lenders now are relaxing their Interest Only Criteria for historical and new applications, in light of much higher mortgage interest rates not seen since before 2008, where clients are having difficulties now.


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James Miles
Director - Mortgage Adviser at The Mortgage Quarter
We've seen a reduction in interest only lending ever since the Mortgage Market Review (MMR) in 2014 as lenders and advisers have a duty to ensure the borower has a suitable repayment vehicle in place. Legacy mortgages have come up to maturity with many putting their heads in the sands and realised they haven't made sufficient plans and have had to sell their home.

If you're on an interest only mortgage and have no repayment strategy act sooner rather than later so you can make overpayments to reduce the debt, liaise with your lender to understand the consequence upon maturity and get the right advice now if you're struggling.