Figures released today show there were 1,023,000 pure interest-only mortgages on the books at the end of 2019 – a drop of 8.9% from the same time in 2018.

Meanwhile, there were 318,000 part-and-part interest-only loans outstanding which is 11.7% fewer than in 2018.

This means, since 2012, the total interest-only stock has decreased by 58% in number and 47% in value since 2012.

James Tatch, principal, analytics at UK Finance, said the 10% drop of total interest-only mortgages – both pure and partial – to 1.3 million between the end of 2018 and 2019 was ‘good news’ and confirmed its expected improvements.

He added: “The spread of Covid-19 and the economic consequences of lockdown have eclipsed most, if not all, other concerns in financial services.

“In particular in the mortgage space, with 1.9 million customers taking a Covid-19-related payment deferral, it has become even more important to understand the profile and risk characteristics of the existing mortgage customer base, as millions of homeowners have found themselves under unforeseeable financial stress.”

Risk profile

UK Finance’s figures showed evidence of improvement to the risk profile of these loans. Indeed, the number of interest-only loans which were higher than 75% loan-to-value (LTV) had fallen by 26% over the course of 2019 to 111,000.

These high LTV loans now made up 11% of the interest-only books, compared to 13% in 2018 and 36% in 2012.

Tatch said these falls in came in a year when house price inflation was relatively modest.

He explained: “This indicates that, with house price increases contributing only a marginal uplift in equity stakes, positive actions by customers, helped by pro-active communication strategies by lenders, have continued to help move those at potentially higher risk either down the risk curve (by paying down some of the capital) or, by redeeming in full, out of the interest-only book entirely.”

The number of interest-only loans set to mature by 2020 also reduced by 72,000 in 2019 to reach 54,000 – a fall of 57.1%. Figures indicated a 7% reduction in loans due to mature between 2021 and 2027.

Interest-only mortgage holidays

Tatch said its analysis suggested interest-only customers were ‘proportionally somewhat less likely’ to have taken payment deferrals due to difficulties during the pandemic.

He added: “As with the wider mortgage market and, in fact, all households, interest-only customers are managing their household finances through a hugely uncertain and, for many, adverse economic environment.

“In these circumstances, it is a good news story that the much- reduced interest-only mortgage population is in a good position to weather the storm.

“However, there will be some customers who need further support and lenders stand ready to offer that support, either through further deferred payments which are available until the end of October or individual consideration of customer circumstances if repaying the capital at the end of the term is problematic.”