Interest only mortgages, which were once the lifeblood of the home loans market, face being wiped out.
The total number of this type of mortgage, where borrower payments only cover the interest rather than the original loan, has slumped by 70 percent in the past decade.
And industry experts believe they will all by disappear over the next ten years.
Interest only mortgages were popular at one time because they allowed first time buyers to get on the property ladder by reducing the monthly repayments.
However, these same buyers then still had to pay off the original loan when it came to an end in 25 years, which could mean having to find a hefty sum. Many took out separate endowment policies to cover the cost, or put money aside each month into savings.
Analysis of data collected by UK Finance, which is the finance industry trade body, by April Mortgages shows that interest-only mortgages could decline to just 2 percent of the market within the next 10 years.
The number of pure interest-only mortgages has dropped by 70 percent over the past decade – down from 2.2m to 664,000 – representing only 8 percent of the residential mortgage market.
Rachael Hunnisett, director at longer-term lender April Mortgages, warned lenders that effectively killing off interest-only mortgages may be undervaluing a valuable financial planning tool for homeowners.
She said that more than 1.5 million interest-only loans have reached maturity over the past ten years with borrowers either repaying their mortgage in full or switching to a repayment deal.
Over the next decade, April Mortgages forecasts that if the current rate of decline persists, the number of interest-only mortgages could drop to around 184,000.
There are concerns that, in the past, buyers were offered interest=only deals that they would struggle to repay, leading to arrears and repossessions.
Rachael Hunnisett, director, April Mortgages, comments: “The interest-only market has shrunk to just over one-quarter of its size 10 years ago.
“Part of this reduction in the market will be driven by enhanced regulatory oversight which has played a crucial role in ensuring responsible lending practices, alongside lenders scaling back or withdrawing interest-only products to align with their own appetites to lend.
“Our projections based on market trends from the last decade reveal that interest-only mortgages could make up as little as 2 percent of all outstanding residential mortgages by 2034.
“This puts the future of interest-only mortgages in-doubt and risks limiting consumer choice at a time when borrowers have proven their ability to meet repayment commitments.
“The interest rate shock that many borrowers are currently experiencing as their fixed mortgage comes to an end, highlights why interest-only deals should remain widely-available to borrowers.
“Homeowners who are facing a sharp rise in their mortgage repayments may not want to lock in a higher rate or have to extend their mortgage term to keep costs down.
“An interest-only mortgage can be a viable solution in this situation as it hands control back to the borrower and provides greater payment certainty and security.
“While interest-only mortgages are not for everyone, they can be advantageous for older homeowners with considerable equity, as well as first-time borrowers wanting to improve their affordability.”
April Mortgages has bucked the trend and launched a new range of residential interest-only mortgages.
The range is available to first-time buyers and remortgage customers with five, 10 and 15 year fixed rates starting at 5.25 percent, 5.25 percent and 5.36 percent respectively.
Loan terms of between five and 40 years are available, as are loan to ratios of six times income for borrowers with a minimum equity of £200,000, or £300,000 in London.
