Interest-only mortgage risk reducing, says CML

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The risk of interest-only mortgages is reducing, with the number of such outstanding loans falling by a third to 1.7 million since 2012, according to the Council of Mortgage Lenders.

CML research shows that there were around 3.2 million interest-only loans in 2012, when it started collecting data.

The CML says the risk of this volume of interest-only loans “had the potential to be significant”, but that this danger had been headed off.

CML analytics manager James Tatch says: “Since then, 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.”

By the end of 2015 this figure had fallen to around 1.7 million, with another 500,000 loans being part-and-part.

The CML says that only a third of the drop came from loans being paid off, meaning that deliberate remortgaging played a large part in the turnaround.

The trade body says that 29 per cent of total redemptions were from loans due to mature from 2028.

Residential interest only chart

The CML adds that lenders appear to be steering borrowers away from interest-only when remortgaging comes around.

Tatch says: “In some cases, the borrowers will now be mortgage-free, either trading down or paying off in full from savings or other sources. But where they took out a new mortgage on redemption, our research suggests that, in most cases, this was on a repayment basis, rather than a new interest-only loan to replace the old one.”

The CML adds that the risk profile of the remaining interest-only mortgages is decreasing too.

Tatch says: “Another trend we have seen is the overall profile of the remaining interest-only stock becoming progressively lower-risk each year, in terms of borrowers’ debt relative to property value.

“Part of this is the beneficial effect of house price inflation, and last year average price increases of 5.5% (measured by the ONS index) helped with this de-leveraging process.

“But we continue to see over-and-above inflation improvement in the loan-to-value (LTV) profile.

“As Chart 2 (below) shows, the movement last year is again beyond what we would have seen purely through inflation, and particularly at the high end of the LTV spectrum.”

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Tatch says the industry now has an interest-only book that is “considerably leaner and healthier than it was four years ago”.

He says: “For example, in 2012 there were nearly 900,000 interest-only borrowers with an LTV ratio of over 75%. Today, there are just over 300,000.”

The CML says it expects numbers of interest-only loans to fall further, but that interest-only risk can never be totally eliminated.

Tatch says: “With targeted interest-only contact strategies now a permanent feature of lenders’ back-book management, we see this positive story continuing. But 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.”