The risk of interest-only loans is falling year-on-year, despite 300,000 such mortgages not being fully paid back at their term end since 2011, according to the Council of Mortgage Lenders.
The CML says its latest member data of 90 per cent of UK residential mortgages shows that the number of outstanding residential interest-only loans has been falling by between 10 and 13 per cent a year since 2012.
The trade body says that fewer than 2 per cent of new house purchase loans are interest-only , compared to a peak of nearly 40 per cent in 2007.
The CML also says it is positive that nearly half of the 2016 drop in outstanding interest-only loans came from mortgages not maturing until at least 2028.
By contrast, much of the 2012-2015 drop in the lending class came from loans redeeming on maturity.
The CML also noted that the number of interest-only loans at higher loan-to-value ratios fell in 2016.
Not paid back
The CML says lenders have reported around 300,000 loans that did not redeem fully on their maturity date since 2011.
It adds: “At face value, this looks like a big number. But this can occur for a number of reasons, many of which are very much short term timing issues.”
Some cases could be a mismatch of maturity dates between a repayment vehicle and the mortgage itself, the CML suggests.
It adds: “Our data suggest that the majority of cases are indeed short term in nature, and redeem without any need for formal intervention.
“In a minority of cases, this process is not so smooth and requires more time or intervention.
Lenders work with borrowers in these situations to explore the best route through post-term repayments.
“Resorting to litigation and ultimately taking possession is then only necessary when it is the best interests of the borrower because there are no other viable options.”
The trade body also says there are a “small, but material, number of higher risk loans”.
There are 11,000 loans at more than 75 per cent LTV with two years or fewer to run.
This category is also reducing in size, but at a slower pace for higher LTV loans.
The trade body adds: “With at most two years to run, inflation can do little to improve the equity position for these loans. Even though this segment represents less than 1 per cent of the book, it is the highest risk – at least with respect to impending maturity and high leveraging.”
It is “crucial” these borrowers have good ways to repay their loans or act now to help their position, the CML adds.
But the trade body adds that interest-only is not inherently risky.
It says: “Interest-only is not inherently higher risk lending. Rather, it is that, in the absence of ongoing information on ability to repay the principal (as we do have for repayment mortgages), the risk is unquantified.”
The latest CML announcement echoes one on interest-only last June, when it also downplayed the risk of this mortgage type.