Over a number of years prior to the global credit crisis many people buying homes were able to get interest only mortgages, and these mortgages allowed the buyer to repay only the interest on the mortgage over the repayment term, with the actual loan amount being repayable only at the end of the repayment term.

The reason why so many people opted for this type of mortgage was because the monthly repayments were far higher because borrowers were only making repayments on the interest rather than on both the capital and interest. However, the idea behind these mortgages was that borrowers had a sideline investment that they could use to pay the loan off at the end of the mortgage term, and this is something that many failed to do.

As a result of the high risk associated with interest only mortgages many lenders have now stopped offering them, and there are concerned that this could cause severe problems for current interest only mortgage customers who need to remortgage.

Officials have said that around one million homeowners who have interest only mortgages could be sitting on a mortgage time bomb because they may find that if they need to remortgage they will get moved to a repayment mortgage, which means that their monthly repayments will be far higher.

A spokesperson from Private Finance said: ‘Borrowers are under increasing pressure to switch to a repayment loan. But the monthly cost of a repayment mortgage is far higher than interest-only, so if lenders stop offering interest-only options, borrowers may be unable to remortgage. This could mean going onto their lender’s standard variable rate (SVR), rather than remortgaging to a fix or tracker, which could become unaffordable when interest rates start to rise.’