Interest in interest-only mortgages plummets

The number of interest-only mortgages has almost halved in the past six years, UK Finance figures reveal.

There are currently 1.7 million outstanding interest-only mortgages (including partial interest-only), down 46% since 2012, when this data was first collected. The total value of the interest-only mortgage book is £250 billion, down 37% in the same period.

There were 1,293,000 pure interest-only homeowner mortgages outstanding at the end of 2017, 14.9% fewer than last year. There were 429,000 partial interest-only homeowner mortgages outstanding at the end of 2017, a 2.1% rise over the last year.

A separate study by UK Finance reveals that of the one million interest-only loans due to mature by 2020 that were live at the end of 2012, only around 200,000 now remain. Whilst making contact with borrowers who are more reluctant to engage remains a challenge, there is also evidence that lenders are seeing greater success here, and the vast majority of borrowers who do engage have repayment plans in place.

The Financial Conduct Authority carried out a review in 2013 to assess whether interest-only mortgages were working for customers and whether borrowers would be able to repay their debt as the interest-only loan reached maturity.

The FCA also encouraged lenders to step up their engagement in terms of communicating with customers well before they come to the end of their IO loan. In 2015 lenders fulfilled an industry-wide commitment to contact all interest-only borrowers with loans scheduled to mature before the end of 2020, to ensure they were on track to repay their loans and, where there looked to be problems, work with borrowers to rectify the situation.

The vast majority of borrowers who do engage have repayment plans in place. However, there is a small minority of borrowers each year that do not redeem their interest-only mortgages in full on the maturity date. Last year there were 34,000 such “term-expired” mortgages.

The majority of such cases – about 90% – do redeem their mortgage in full within three months of the maturity date, without the need for any intervention.

Where this does not happen, lenders will typically offer borrowers a range of options to allow repayment of the loan. This might involve formally extending the term of the loan. Alternatively, growing numbers of borrowers are moved on to repayment mortgages and repay the loan in that way. A number of borrowers sell their properties to repay the mortgage debt.

Last year, there were 250,000 mortgages which moved out of the interest-only mortgage book. Of these 21,000 (8%) were conversions to capital and interest with the same lender, and almost all the rest were full redemptions.
Jackie Bennett, Director of Mortgages at UK Finance, commented:

“The number of outstanding interest-only loans has halved in the past six years, with a particularly steep decline in higher loan-to-value mortgages.

“Many borrowers continue to redeem ahead of schedule or switch to a repayment mortgage.

“However, there remains plenty more work to do over the coming years to ensure that those remaining borrowers who have so far been reluctant to engage have viable repayment plans in place.

“We continue to encourage all borrowers with interest-only mortgages to contact their lender as soon as possible, as the sooner they do so the more options will be available.

“UK Finance will also be developing new best practice for lenders in this area, to reflect the changing regulatory landscape and help the industry engage successfully with more borrowers.”


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