Banks and building societies are exposed to £116 billion worth of interest-only mortgages due to mature over the next eight years, and for which the borrower has no specified repayment plan, according to new research.

The findings are from Xit2, who reveal that of the 11.24 million currently outstanding UK mortgages, almost one in ten (9.3%) are on interest-only loan terms with no repayment plan, and due to mature by 2020. This figure accounts for some £116 billion of the £1.25 trillion in outstanding mortgage balances.

Xit2, who specialise in survey, valuation and asset management data exchange, say that since 2002 there have been 1.28 million individual interest-only loans approved for house purchase loans and which have no repayment plan representing some 14% of total house purchases in the last ten years.

The large number of outstanding balances is a legacy of the high number of interest-only mortgages granted prior to the financial crisis. Despite lenders acknowledging the problem and cutting back on their interest-only lending, the outstanding balance of interest-only mortgages hasn’t been significantly reduced.

Analysis by Xit2 of interest-only deals found that the bulk of those mortgages date back to before the financial crisis, when the market had easier access to credit. Outstanding mortgage balances have doubled since 2002, rising from £626 billion to £1.25 trillion as of Q2 this year.

During that time, interest-only mortgages with no repayment vehicle have accounted for an increasingly large percentage of overall annual lending, hitting a peak between 2005 and 2008. In 2002, interest-only loans with no repayment plan accounted for 12% of new house purchase loans granted that year however by the start of 2008, just before the financial crisis, that figure had risen to 30% .

The bulk of these interest-only loans were granted in the mid-2000s, and are due to mature in the next eight years. With the economy in a weak state, and savings rates at rock-bottom, lenders will be concerned borrowers on interest-only mortgages with no specified payment plan have no means to repay their outstanding balances.

Mark Blackwell, managing director of xit2, said: “The interest-only problem is a big structural issue for lenders. The Mortgage Market Review has highlighted interest-only as an area that needs special attention. And no wonder. The big block of outstanding balances which are due to mature over the next eight years is a legacy of unsustainably high interest-only lending prior to the financial crisis. If lenders fail to help these borrowers find a repayment vehicle, it will come back and give them a nasty bite around 2020 when the big batch of high-LTV interest-only loans granted in the mid-2000s mature. 80% of these borrowers have no repayment plan.

“Plenty of those will be families on tight monthly budgets, with low household earnings and little to no life savings. With the economy limping rather than running, many of these borrowers won’t be able to pay off their mortgage before it matures and will be stuck in arrears.

“The likely prospect of a rise in the base rate only adds to the problem. Mortgage rates have nosedived since 2008, and to some extent that has hidden the deep-seated problems in the finances of many customers on interest-only. Once the base rate does go up, plenty of these borrowers won’t be able to afford the sharp increase in their monthly repayments, and could well tip more of them into serious arrears.

Mr Blackwell added: “If lenders fail to identify these struggling interest-only customers and fail to find them a suitable repayment plan, they will come under withering criticism for failing to treat their customers fairly.

“Over the last few years banks have grasped the extent of the problem and scaled back their interest-only lending. In 2008, interest-only accounted for 30% all house purchase loans. Two-thirds of those affected have no repayment vehicle in place.”

Blackwell concluded: “Lenders have acknowledged the severity of the problem over the last twelve months, and have tightened up lending criteria on their interest-only mortgages. But they’re just closing the door after the horse has bolted.”