No loss of interest but the numbers are falling
Published: 7 May 2014 | Author: Bernard Clarke
One year on from the launch of the lending industry’s commitment to contact every borrower with an interest-only mortgage due to mature before the end of 2020, our data shows that the number of outstanding interest-only mortgages has declined by 12%.
Lenders agreed with the Financial Conduct Authority a broad strategy of contacting every interest-only borrower with a mortgage maturing in the next six years and, in the year since then, they have used a variety of means – letters, telephone contact, online information and some face-to-face communications – to encourage customers to take positive action to manage their interest-only mortgages.
The positive outcome of this work is shown by the results of a survey we undertook at the end of last year, representing around 96% of the market. It showed that the number of pure interest-only mortgages outstanding had fallen by 300,000 to an estimated 2.2 million – or by 12% – since 2012. Over the same period, the number of part interest-only, part repayment mortgages also fell by around 90,000 to 620,000 (or by 13%).
Our data shows that the loan-to-value profile of outstanding interest-only mortgages has also improved. Two-thirds of outstanding interest-only mortgages have loan-to-value (LTV) ratios below 75%, and the vast majority of these are not due to mature until after 2020.
Chart One shows a series of reductions in the number of interest-only mortgages in all LTV bands. Some of these reductions would have been achieved solely as a result of house price inflation. But the chart shows that in every LTV band borrowers have taken additional measures to reduce overall levels of debt.
Chart One: Changes in interest-only loans outstanding, September 2012-December 2013, by LTV
The chart shows that the effect of house price inflation on its own would have been to increase the number of interest-only mortgages at lower LTV ratios as loans moved down from higher bands. But, in fact, every band saw a decrease – showing that borrowers have taken action across the board to reduce overall indebtedness.
Clearly, however, there is more work to do, and we are now finalising the arrangements for a major conference next month focusing on developments in the interest-only sector.
We are now taking bookings for the conference, Interest-only: Still interesting, which will be held at a London venue on 10 June. The conference, which is closed to the press, will examine new CML data on outstanding interest-only mortgages, as well as focusing on customer contact and end-of-term strategies and providing a forum for lenders to share their experiences.
We are continuing to work closely with firms and the FCA to help interest-only customers manage their loans and avoid surprises at the end of the term. This work will continue over the long term.
We believe that the number of borrowers who may still find it difficult to put in place adequate plans to repay their mortgage in full and on time will be relatively modest. However, lenders are fully committed to helping borrowers avoid this outcome, and to providing assistance to those who cannot reach full repayment by maturity.
A range of steps may be possible, depending on individual circumstances. Options may include releasing equity through a lifetime mortgage, downsizing, or selling and moving into rented accommodation. The lending industry’s continuing programme of contact should help borrowers identify and implement what works for them.