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Interest-only time bomb is overstated, says CML

The Council of Mortgage Lenders says pronouncements of an interest-only time bomb are exaggerated.

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.

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  • Luke Atkinson 29th March 2012 at 10:06 am

    Bobby, Aaron is right, this will happen.

    The vultures are circling.

  • We're all doomed!! 29th March 2012 at 10:05 am

    Arron is spot on here. Whilst there may well have been nothing wrong in the initial advice process with regards to the sale of interest only, if it was not documented accurately, the adviser may well be open to a claim.

    This would include any review – for example, if anyone sold an interest only where the client was going to consider converting to repayment after a set period, if the adviser cannot prove he attempted to discuss this with the client again when this set period expired, he will be leaving himself open.

    The old adage of “If it ain’t documented, it didn’t happen” will apply upon claim. And we all know that the Ambulance Chasers will be jumping on this one before long.

  • GHU 29th March 2012 at 9:51 am

    To Ian Windsor-Smith I have one question:

    When did any lender offer a borrower a tenancy agreement. I thought a mortgage was a loan that needed to be reapid at the end of the contractual term and that the customer signed up to this when they accepted the funds.

  • Arron Bardoe 28th March 2012 at 10:44 pm

    Sadly Bobby the ambulance chasers picked up on this new money spinner at the end of the last year and have already submitted claims.

    I agree many will initially be refuted as the good networks identified this risk some years ago, so the first test cases should hit FOS any week now.

    My advice is to run through old sales and review them now to at least ensure your paperwork is spotless and ideally you have letters from the client acknowledging the advice and risks of IO.

  • Jenny Taylor 28th March 2012 at 5:26 pm

    This is very simple. There is nothing ostensibly wrong with an interest only mortgage. This talk of interest only mortgages maturing as nif they were a repayment loan is also disingenuous – they don’t have to ‘mature’ as they are not paying back anything and the return on them to a lender is so good that it is in the lender’s interest (no pun intended) to let them continue on. In 25 years, the loan will be less in overall terms (inflation alone, let alone HPI) and if the borrower has to sell the house to pay it off – so be it. Most will want to downsize in 25 years anyway. Altenratively, an innovative lender or government (just look what they are doing to planning) might come up with an equity conversion plan – convert the outstanding balance to an equity share based on the then current value of the property (by then occupied by a couple of OAPs). We haven’t even started to think about this and those that crow on about having too much spendable income available or it’s all echo’s of the past, need to get out more. How else are we going to get out of this economic mess if we don’t start spending? And if you think I’m going to spend the next 10 years ‘saving’ or being frugal, think again. I could get run over by a bendy bus tomorrow….interest only or repayment? No contest. 🙂

  • Bobby 28th March 2012 at 4:05 pm

    No Arron. I can confidently say there will NO successful claims on this. Its like the ” unfair credit ” scam a couple of years back. The judges will throw it out. Its the CLIENTS responsibiity to have their plan in place, NOT the broker and NOT the lender. Ridiculous state of affairs. If a single ” claim ” is paid this country has finally gone completely mad.

  • Arron Bardoe 28th March 2012 at 3:02 pm

    Advocates of interest only seem to believe everyone should have one and spend the excess money on a better life and not repaying debt. This is the same policy as the last Government who have run up £1 trillion in the hope of economic growth.
    Lenders are now asking retiring customers how they will pay their mortgages.
    For many, their reduced income means they must sell the “home they love”. Others will be forcibly repossessed by the lenders – the media have no deoubt reserved their front pages for the “evil bankers”.
    A few will be able to afford their mortgage.
    From all groups however there will be calls to claims management firms with complaints about the mortgage advice and pleas of ignorance on being told the risks.
    Like endowments, the industry will then have to pay out on all cases where the documentation is not 100% and many advisers will see PI companies subrogating the cost of the claims to them.
    In view that the income multiples have been the same with most lenders for interest only or repayment mortgages, the repayment method has rarely hampered borrowers finding the “home they love”. It is more about whether they are prepared to sacrifice some luxuries.
    I suggest all advisers review their files and ensure they are protected.

  • Ian Windsor-Smith 28th March 2012 at 1:49 pm

    Another ploy to enforce higher monthly payments into lenders coffers whilst continuing a “NO LEND” policy. Many people have interest only so they can live in a house they love, at a price they can afford, which is cheaper than rent in a similar or less desirable area.
    This enforced increase plus racketering higher base rates will only serve to help depress housing, increase reposessions and take away customer choices. Lenders want absolute control.

  • Stuart Gregory 28th March 2012 at 1:31 pm

    Have to say, I disagree with the CML on this.

    Two issues – it doesn’t touch on the procedures that lenders will now follow after their own amendments to Interest Only criteria.

    In the past, lenders have shown assistance to interest only borrowers who need more time to clear the debt.

    Will this still happen?

    Secondly, it disregards the changes to interest only lending policy – which WILL cause havoc in the next few years.

    I don’t want my clients sleepwalking into problems in the future and will be warning them accordingly.