London: UK banks are stepping up efforts to cope with increasing numbers of retired customers who have interest-only mortgages they will not be able to repay as the industry seeks to avoid a fresh wave of repossessions.

There are about 2.8 million people in the UK with interest-only mortgages worth in total about £363 billion (Dh2.1 trillion), according to the Council of Mortgage Lenders. That is almost a third of the country’s entire mortgage stock. Many of the loans were granted in the past two decades to baby boomers who are starting to enter retirement.

Banks estimate that about 2 per cent of these customers do not have a clear repayment plan. But a mail shot to 31,000 interest-only customers earlier this year found that of the 50 per cent that responded, 5 per cent — about 1,500 customers — were unaware they had interest-only loans.

Steve Pateman, head of UK banking at Santander, said: “We have got to find a way to help people and we can’t just put them in a sausage machine and process them so they are out of their houses in six months.”

He said the bank, which bought Abbey National, Alliance & Leicester and Bradford & Bingley to become the UK’s fifth-biggest retail network, would have a “systemic approach” to dealing with retired people who cannot repay their interest-only mortgage. “We could convert them to a lifetime mortgage,” he said.

A lifetime mortgage allows people to stay in their home until they die or go into long-term care by borrowing more against the value of the property to meet the interest and principal repayments of the loan. “I can’t run the risk of mis-selling, so I need to sit down and explain it, make sure the client has legal advice and that their children know exactly what is going on, as it can come as a shock to them,” said Pateman. “I am trying to develop individual solutions in a 150 billion pounds mortgage book — that is an interesting challenge.”

UK Asset Resolution, the group that is running down the old mortgage portfolios of failed lenders Northern Rock and Bradford & Bingley, is among the most exposed lenders to interest-only mortgages — and a large proportion of those loans are held by retired borrowers.

Overall UKAR has about 85,000 mortgage accounts where at least one customer on the account will be over the age of 65 at the end of the term. It has about 20,000 accounts where the customer is already retired, about half of which are on interest-only terms.

Many of these customers have benefited from high house price growth over a number of years and have credible investment plans — such as endowments or other saving vehicles — to pay off the capital at the end of the mortgage term.

However, UKAR is aware that a proportion of these customers will struggle to make the repayment while some have been unaware that they have only been paying interest. The group, like other lenders, has been writing to interest-only customers, reminding them that they will need to repay their mortgage capital.

One executive at a top mortgage lender said lifetime mortgages were higher risk and therefore less than 1 per cent of the market, but added that they could be the best solution to avoid default by interest-only mortgage customers.

“I think we are going to see quite a lot of innovation in this area, particularly as we approach peak maturity date,” said the executive.

— Financial Times