CML reports 16% annual fall in interest-only back book as lenders maintain efforts to ensure borrowers have repayment plans in place
Published: 22 September 2015 | Author: Gareth Hill
Over the past two years, the total number of interest-only loans outstanding has fallen by over a quarter, according to the Council of Mortgage Lenders - with a 16% reduction in the number of loans over the past year alone.
In an article published today, the CML outlines the progress that has been made and the ongoing steps that are being taken by the industry to check that borrowers with interest-only mortgages have plans for how they will repay their loans at maturity.
As at the end of 2014, CML members reported that there were around 1.9 million pure interest-only mortgages outstanding, and around 460,000 part interest-only mortgages. This was around 300,000 fewer pure interest-only mortgages and 160,000 part interest-only mortgages than a year earlier.
A quarter of this reduction is down to natural attrition (loans maturing and repaying at the end of their term). Around a third can be attributed to full redemption of loans not set to mature until at least 2028 - suggesting that many borrowers are taking action well before problems could arise. This also suggests that a significant group of borrowers are successfully remortgaging onto full repayment terms without falling foul of new affordability rules.
Of those loans that have matured, few have failed to repay. In total, there are fewer than 16,000 loans outstanding which have matured but not yet repaid or restructured - and previous experience shows that most such loans subsequently redeem within a relatively few months of maturity.
While this is good news, there is no room for complacency. CML members are continuing to think about the options for customers who may not be able to repay their mortgages. This includes more partnering with third-party advice providers, including equity release firms, and product innovations that may help some borrowers.
It remains a challenge to get borrowers to respond to lender contact designed to help them plan for their mortgage's repayment at maturity. Lenders contacted around 427,000 interest-only customers between April and December 2014 (about 17% of all interest-only borrowers). During 2014, the focus of lender communications moved beyond those whose mortgages are due to mature by 2020, and included borrowers whose mortgages are not due to mature until after this.
Response rates by borrowers varied. Around 27% of those contacted whose mortgages are due to mature between 2021 and 2028 responded , but only a disappointing 2% of those whose mortgages are not due to mature until after 2028 did. However, where lenders did succeed in getting customers to respond, 86% of those who responded had a repayment strategy, and those who did not appeared responsive to making changes (such as switching to repayment terms, overpayments and term extensions).
This suggests that the main practical focus for lenders needs to remain on getting customers to engage with them and discuss their plans. The CML will try to help lenders develop approaches to customer contact strategies that most encourage customers to respond.
CML members will continue to target relevant communication at their interest-only customers to remind them of the need to have a plan for repayment at maturity, and support them if they need help. CML members keep under constant review the types of contact strategies that will encourage customers to respond.
Commenting on progress, CML director general Paul Smee said:
The continued decline in interest-only mortgages outstanding confirms our perception that many borrowers are firmly on top of this issue, and successfully making plans to manage their loans to ensure they are not faced with a payment shortfall at maturity. But as an industry we clearly still have work to do to trigger more borrowers to respond to their lenders' attempts to understand their intentions and help them plan ahead for the maturity of their loans.
Notes to editors
1. The Council of Mortgage Lenders' members are banks, building societies and other lenders who together undertake around 95% of all residential mortgage lending in the UK. There are 11.1 million mortgages in the UK, with loans worth over £1.3 trillion.
2. The CML results reported here are based on qualitative and quantitative surveys of members. Further information is available in this article.