The overall stock of outstanding interest-only mortgages fell by 15% in 2021 compared with the position at the end of 2020, figures published by UK Finance have revealed.

Just 32,000 interest-only loans were advanced in 2021, which is less than 3% of total lending. 

In 2012, with 3.2 million interest-only mortgages outstanding, UK Finance suggested the risk that customers could reach the end of their term without the means to repay posed a “significant industry risk”, albeit a hypothetical one given there had been no material evidence of such end-of-term defaults to date.

Since 2014, the lending rules put in place by the FCA mean that new interest-only lending, while still permitted, accounts for just a small minority of activity. At the same time, the industry has also undertaken a collaborative communications programme, reaching out to all interest-only customers to discuss repayment plans and make sure they are on track to repay.

As a result of these efforts, by the end of 2021 there were just 754,000 pure interest-only mortgages outstanding in the UK, as well as a further 252,000 on part interest-only, part repayment terms – reductions of 17% and 9% respectively compared with 2020.

Commenting on the data, CEO at LiveMore, Leon Diamond, said: “Although the amount of new interest-only mortgages taken out in 2021 is small at 3% of total lending (32,000 loans), there is still a place for this type of loan.

“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.”

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