There has been a 13 per cent drop in the number of interest-only mortgages held by borrowers in 2018 compared with the previous year, according to latest data.
Figures published by UK Finance yesterday (June 19) also showed over the past seven years, the total number of interest-only mortgages has fallen by more than half (54 per cent), from 2.5m in 2012 to 1.23m in 2018.
Interest-only deals mean borrowers pay only the interest on the loan during the life of the mortgage.
While the prospect of cheaper monthly payments may seem attractive, customers have faced difficulty with the plans in the past as they found they could not afford to pay off the original capital borrowed from the lender at the end of the term.
For example, some interest-only borrowers found themselves trapped in their policies as banks were less keen to take such customers on following the financial crisis.
Such consumers have been dubbed mortgage prisoners. Their plight has hit the headlines recently as MPs formed a cross-party group to offer their support.
In response to growing concerns surrounding customers with no suitable plan in place, there has been an industry-wide attempt in recent years to ensure that interest-only borrowers are on track to repay their loans or have an alternative solution in place.
For example, a partnership was launched last month between Spicerhaart Corporate Sales, Excel (fact-finding firm) and TLT (UK law firm) to create a solution for lenders and customers with no plan in place to pay off their mortgage.
The data from UK Finance showed such partnerships have already been successful in reducing the number of people holding interest-only mortgages.
The number of interest-only loans set to mature by 2020 shrank by 91,000 in 2018 to 126,000 loans, a drop of 41.9 per cent compared with 2017.
Jackie Bennett, director of mortgages at UK Finance, said: "As we approach 2020, this reduction in numbers represents an industry success story for regulated providers, as lenders continue to improve their contact programmes with borrowers and ensure plans to repay are on track.
"It is as important as ever that we keep up the momentum through to 2020 and beyond, to make sure all borrowers are aware of the need to repay and have viable means to do so.
"For the small minority whose repayment plans do not appear sufficient, it is also very positive news that most interest-only loans now have strong equity stakes. This greater equity means borrowers are likely to access more alternative repayment options should they need them."
Interest-only customers were given a further lifeline when the Financial Conduct Authority re-classified retirement interest-only mortgages in March 2018.
This meant more people could pass the affordability assessments — and use the Rio to continue their interest-only payments — as the policies are now treated as standard mortgages rather than under equity release standards.
Nick Morrey, product technical manager at John Charcol, said: "The industry has moved in the right direction to make sure that we don’t have people getting to retirement with outstanding balances on their interest-only mortgages and that there are appropriate strategies in place to repay those debts so they are mortgage free in retirement."