Stock of interest-only loans a third down since 2012
The number of outstanding mortgages extended under interest-only terms has fallen by almost one third over the past four years, research from the Council of Mortgage Lenders (CML) has revealed.
The number of outstanding interest-only loans dropped from around 3.2m in 2012, to 2.2m last year – a decline of almost a third.
Only a third of the decrease in number of outstanding loans came from loans being paid off when the term of the mortgage expired.
The number of interest-only loans became a significant concern after the financial crisis exposed insufficient lending practices where interest-only mortgages were being handed out with little regard to how the borrower might eventually pay off the capital, not just the interest on the loan.
The risks posed by those with no repayment plan in place were described as a “ticking time-bomb” in 2013 by Martin Wheatley, shortly before he took up the leadership of the Financial Conduct Authority.
James Tatch, analytics manager at CML, said: “Since , the CML and our members have tackled this issue head-on, with lenders proactively contacting interest only borrowers and exploring options where there may be difficulties in repaying the loan.”
He said the Financial Conduct Authority had repeatedly endorsed the industries approach, calling it “a prime example of a model demonstrating good conduct outcomes and putting customers first”.
Those loans which remain on interest-only have reduced in risk each year since the CML began tracking this market in 2012. Loan-to-values (LTV) have continued to fall year-on-year, which the trade body said could only partly be attributed to house price inflation.
Borrowers who benefited from a long-term rise in house prices are paying off their loans by downsizing to smaller properties, or using savings to settle the debts. Others are remortgaging but into other types of repayment methods because of the stigma that surrounds interest-only loans.
In 2012, nearly 900,000 interest-only UK borrowers had loans greater than 75 per cent of the value of their property. That has now dropped to just over 300,000. It said that if those loans were assumed to apply to houses which appreciated by a “modest” 2.5 per cent in value until their maturity, the number over 75 per cent loan-to-value would drop to 50,000.
However, repossession remains the ultimate risk for those who reach the end of their term without any means of repaying the capital sum. The CML said two-thirds of those who reached the term of their mortgage without repaying did so within 12 months, but it added “it is vital that those borrowers still with interest-only mortgages engage with lenders at each point of contact, to ensure that any risks are identified and managed at the right stage”.