New data from UK Finance shows that the number of interest-only mortgages has fallen significantly in the last year. In 2023, there were 664,000 interest-only homeowner mortgages, a drop of 5.4% compared to the previous year. This continues a long-term trend – since 2012, the total number of interest-only mortgages has plummeted by a staggering 73%, with the value of these mortgages also decreasing by 56%.
What is an interest-only mortgage?
Unlike a traditional repayment mortgage, where you pay back both the interest and the loan amount each month, an interest-only mortgage involves just paying the interest. While this can lead to lower monthly payments, it’s crucial to have a plan in place to repay the entire loan amount at the end of the mortgage term.
Why the decline?
The decline in interest-only mortgages is likely due to a number of factors. Tighter lending criteria introduced after the 2008 financial crisis have made it more difficult for borrowers to qualify for these types of mortgages. Additionally, increased awareness of the potential risks associated with interest-only mortgages may have led some borrowers to opt for more traditional repayment methods.
What about existing interest-only mortgage holders?
Despite the overall decline, there are still many homeowners with existing interest-only mortgages. The good news is that the number of loans set to mature by 2027 has decreased by 28.4% in 2023 to 187,000.
Furthermore, UK Finance reports that most borrowers with interest-only mortgages are keeping up with their repayments. Charles Roe, Director of Mortgages at UK Finance, emphasised that regular communication from lenders has helped borrowers stay on track and that lenders are committed to providing support to those who may be struggling.
“Although the mortgage market saw difficult conditions in 2023, most interest-only borrowers continued to repay on or ahead of schedule. The regular communications from lenders will have helped ensure interest-only borrowers remained on track to repay,” Roe stated.
He added, “The number of interest-only mortgages has dropped each year since the end of the financial crisis and fell again last year to around a quarter of the number seen in 2012. The number of borrowers who didn’t repay when their mortgage ended remained very low and most of these borrowers did repay within a few months of the term ending. If you are struggling with your mortgage repayments, please reach out to your lender as soon as possible. Lenders offer a range of support to anyone worried about their finances, with teams of trained experts ready to help.”
The bottom line:
While interest-only mortgages may be less common than they once were, they remain an option for some borrowers. If you are considering an interest-only mortgage or have concerns about an existing one, it’s essential to seek professional financial advice to determine if it’s the right choice for your circumstances.