This research sets out analysis of our data on the population of regulated interest-only mortgages that existed on 31 December 2022, and consumer research undertaken in 2022.
Interest-only mortgages: analysis of FCA mortgage data (PDF)
Interest-only mortgages research (PDF)
Summary
The aim of this analysis is to help us understand the characteristics of the current stock of interest-only mortgages.
Interest-only mortgages are where the borrower’s month payments cover only the interest on the amount borrowed (the capital). The borrower needs to make separate arrangements to repay the capital by the end of the mortgage term.
We also commissioned independent consumer research that considers borrowers experiences with interest-only mortgages and their ability repay these at maturity.
Background
Building on previous work in 2013 and 2018 to assess the performance of these loans and borrowers’ repayment plans, we commissioned consumer research to update our understanding.
We also analysed our own data on the population of regulated interest-only mortgages that existed on 31 December 2022.
The data for both pieces of research was collected over the course of 2022. We recognise that rising interest rates can put more financial pressure on interest-only borrowers, and that since this research was conducted market conditions have continued to change. Consideration of the impact of interest rates was outside the scope of this research.
Based on this analysis, interest-only mortgages currently make up 9% of all regulated mortgages in the UK. 55% of these interest-only mortgages were taken out before the 2008 financial crisis when lenders were not required to check whether a borrower had a credible repayment plan. Before taking out the mortgage, in their illustration documents borrowers will have been made aware that the capital needs to be repaid at the end of their term and that their monthly payments only covered the interest.
Following the 2013 research we have made several interventions including:
- guidance for firms on dealing fairly with interest-only borrowers who may be at risk of not being able to repay their loan
- introduced new rules as part of the Mortgage Market Review
- carried out a thematic review on the fair treatment of existing interest-only borrowers
Next steps
We will engage with industry and consumer groups to discuss the findings of our research and the meaningful steps the sector can take to further support interest-only borrowers approaching the end of their mortgage term without a credible repayment plan in place. Part of this engagement will include looking at the impact of increasing interest rates have had on a borrower's ability to repay the capital.
With the Consumer Duty now in effect firms should now be thinking about how they will support their borrowers and meet the higher expectations the Duty sets.
We will be reviewing our existing guidance on the fair treatment of interest-only borrowers to ensure it is in line with the higher standards set by the Duty.