There are currently 1.9m interest-only loans, with a third of these due to mature in the 2030s.
With this type of mortgage, as the name suggests, you only repay the interest on the amount you’ve borrowed each month. The capital must be repaid when the mortgage term ends.
Millions of borrowers took out this type of mortgage in the late 1990s and early 2000s, but lenders made it much harder to qualify for them after the financial crisis of 2008, amid concerns that homeowners may not be able to fully repay what they owe at the end of the mortgage term.
The mortgage industry has taken steps to ensure lenders contact customers with interest-only mortgages to check that they are on track to repay what they owe. If they don’t have a suitable repayment strategy in place, lenders will discuss the various options available to the borrower, such as switching to a repayment mortgage where both the capital and interest are repaid each month.
Even though interest-only mortgage lending is declining, it is still possible to take out this kind of mortgage, provided you can provide evidence that you have an appropriate repayment vehicle in place.
Some lenders have recently relaxed the criteria borrowers are required to meet if they want an interest-only mortgage, although most will want you to have a higher level of income than you would need if applying for a repayment mortgage.
The city regulator the Financial Conduct Authority will publish its review into interest-only mortgages in the final three months of this year.
Around 600,000 interest-only borrowers will see their mortgages mature before 2020, according to the FCA, with just under half of these expected to have a shortfall.