At the Treasury Select Committee two weeks ago, Martin Wheatley, managing director of the conduct business unit at the Financial Services Authority, referred to the sizeable stock of outstanding interest-only loans as a ticking time bomb.
According to the CML’s analysis, there are around 3.9 million outstanding interest-only mortgages.
Of these, two-thirds are set to mature after 2020. In the meantime, the number of interest-only mortgages set to mature each year is between 131,000 and 158,000.
This compares with around 7.3 million capital and interest mortgages currently held by UK consumers.
The CML says the interest-only loans scheduled to mature in the next few years are, on average, comparatively low value, reflecting the fact that the majority of these loans will have been taken out 20 to 30 years ago, when house prices were lower.
It believes the majority of interest-only loans maturing throughout this decade have a comfortable equity cushion.
For loans maturing over the next three years, over half have an equity stake of over 70% of the property value and a further third have a stake of more than 45% of the property value.
In total it estimates there are 6,000 interest-only mortgages – just 1% of all interest-only loans due to mature over that time – with less than 10% equity.
The trade body says it is also likely that a significant proportion of these loans have an accompanying repayment vehicle such as an endowment, pension or ISA. And some borrowers may have other sources of funds to repay the debt, such as savings or inheritance.
In its News & Views newsletter today, It says: “We therefore think that the ticking time bomb is overstated as a description for the majority of interest-only mortgages due to mature in the next few years.”
The CML says it is actively working with lenders and the Financial Services Authority to identify and implement useful steps to help interest-only borrowers avoid nasty shocks.
It believes the proportion of borrowers unable to repay their mortgage at term is likely to be small, but difficult to quantify.