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One in three fail to repay interest-only mortgages

One in three borrowers with interest-only loans failed to repay the mortgage at the end of the term, according to new data.

The S&P Global Ratings report looked at interest-only mortgages due to mature over an 18-month period, to June 2017.

It found that a 36 per cent of these were still outstanding at the end of this period.

A break down by mortgage type shows that approximately 27.5 per cent of residential interest-only mortgages are still outstanding at the end of the term, and around 8.5 per cent of buy-to-let loans are.

This research looked at the interest-only mortgage loans in 84 residential mortgage backed securities – representing some £15.2bn. There are concerns that failure to repay these debt could cause difficulties in the housing market, and create credit issues for the banks issuing these securities.

This report identified borrowers who were at higher risk of failing to repay these loans.

This included those who were aged 55 or over, those who were self-employed and those who had self-certified their income when taking out the loan.

The report notes: “Borrowers who are self-employed show a disproportionate tendency not to repay the full balance of their loan at maturity. Self-employed borrowers represent around 38 per cent of the interest-only loans in the sample, but 56 per cent of interest-only loans not redeemed at maturity.”

This research shows that 73 per cent of those failing to redeem these mortgages were aged 55 or over.

Most of these mortgage deals were taken out in the period leading up to 2008. The report points out that despite these homeowners benefiting from lower mortgage repayments  – in some cases borrowers have seen repayments fall by 65 per cent over this period – many have failed to save into a suitable repayment vehicle.

The report said: “Elderly borrowers who lack a sufficient repayment vehicle have limited alternatives. Given that many of these borrowers have failed to save while they were of employment age and in a lower interest rate environment, we do not anticipate that they will be able to save enough to pay to pay off the principal as required.”

However, where borrowers live can have a huge impact on their ability to redeem these mortgages. Increases in house prices in the South East mean borrowers in this region may have the option of downsizing and repaying this debt.

The opposite is true for borrowers in the North West of England, Northern Ireland and Scotland, where there has been little house price growth since the origination of these loans.

S&P points out that these interest-only loans were often advanced to borrowers who could not afford a repayment loan, so affordability tends to be lower than the market as a whole.

“Borrowers who have taken out interest-only loans are expected to either refinance their loans or use a repayment vehicle to pay off the loan at maturity.

“However, we have observed that an increasing and significant number of borrowers with interest-only loans have not repaid the principal at the due date.”

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