Although it was obscured by the unprecedented events that have dominated the news feeds, 2020 was the year by which, according to a much-repeated quote from 2012, a 'ticking time bomb? of interest-only mortgages could reach maturity with the borrowers unable to repay the capital.

The mortgage industry has devoted significant and ongoing resource to ensure that this risk never crystallises, beginning with an industry-wide commitment to contact all customers with an interest-only mortgage maturing on or before the end of 2020 to check they were on track to repay their loan and, where this was not the case, agree a viable repayment plan with the customer.

While the industry made good on its ?2020 commitment? in 2014, this was far from the end of the process. Rather, it marked the beginning of a continually evolving programme, collaborative across the industry and with the regulator, to contact all customers with interest-only mortgages at regular intervals and ensure all are both aware of the need to repay and have the means to do so.

Making successful contact with customers can be challenging, far more so when the topic is both the customer's home and the largest debt that most of us will ever have. However, the industry's approach has incrementally paid dividends, as evidenced today in our interest-only mortgages update.

At the end of 2020 there were just 908,000 pure interest-only mortgages outstanding in the UK, and a further 277,000 on part interest-only, part repayment terms. In total, this is 12 per cent fewer than the number in 2019, and nearly two thirds lower than in 2012 when we first collected these data (Chart 1):

Chart 1: number of residential interest-only mortgages outstanding

Source: UK Finance

In each year, a small number of maturing interest-only mortgages do not repay immediately on maturity, usually for logistic timing issues relating to when the funds to repay become available. Our internal data indicates that the vast majority of these do fully repay shortly after, most commonly within six months, and only a small number need longer or require tailored assistance to repay.

It is further evidence of the progress made by the industry since 2013 that, even in a year when so many households? finances have been dented through the pandemic, there were only 25,000 interest-only mortgages that had gone past term without redeeming, the lowest number since at least 2012.

This looks to be supporting evidence that positive actions - both by lenders and their customers - in the years since then has put borrowers in a good position to repay their mortgages, even through a year when so much could have derailed those intentions. The industry has also moved to offer additional support to interest-only customers impacted by the pandemic who needed to take a payment deferral. Where these mortgages were approaching maturity lenders have agreed where needed to delay the capital repayment until October 2021.

Further positive findings from today's data show that within the remaining interest-only stock, the vast majority are in a very healthy equity position helped in large part by another year of robust price growth. Two thirds of all pure interest-only mortgage customers own at least half of their property as free equity, and only 86,000 - nine per cent of the total - hold less than 25 per cent equity. This compares to over 900,000 - 36 per cent of the total - with these low equity stakes in 2012 (Chart 2).

Chart 2: number of residential interest-only mortgages outstanding by current LTV

Source: UK Finance

Overall, the interest-only stock continues to reduce both in size and risk profile, even in a year when it would not have been that surprising if progress had temporarily interrupted. Looking ahead, should prices stall or the employment picture deteriorate, most interest-only mortgage customers are in a much stronger position now than only a few years ago to cope with potential problems.  

Lenders will continue to reach out to contact their interest-only customers to ensure they remain on track with plans. With the ultra-low interest rates that now prevail in the market, it may well be in many customers? interests to make overpayments now, and this may form part of lenders? conversations with their customers where appropriate. The next peak of maturities comes around 2027 and while this may still seem some time away, it is never too early to start planning for repayment and making overpayments now can reap substantial benefits over time. As ever, we strongly encourage all interest-only customers to talk to their lender and, where appropriate, agree plans to repay.