CML: Interest Only strategy working
People are clearly taking action to reduce the risk of not being able to repay their loan when it matures.
Based on a CML survey representing around 96% of the market, at the end of 2013 there were an estimated 2.2 million pure interest-only loans outstanding, and a further 620,000 part interest-only, part repayment mortgages outstanding on lenders’ books.
Compared to 2012 this represents a fall of around 300,000 pure interest-only mortgages (down 12%), and around 90,000 part-and-part mortgages (down 13%).
There has also been a positive set of changes in the loan-to-value profile of outstanding interest-only mortgages.
Two-thirds of outstanding interest-only mortgages have loan-to-value (LTV) ratios of less than 75% – and the vast majority of these are not due to mature until after 2020.
Lenders have been undertaking a variety of activities to encourage their customers to take positive action to manage their interest-only mortgages.
Through letters, telephone contact, online information, and some face-to-face communications, lenders are seeking to help customers take whatever actions best serve their long-term interests. Although there is likely to be a cohort of borrowers who may still find it difficult to put in place adequate plans to repay their interest-only mortgages in full and on time, the number of such borrowers is likely to be relatively modest.
CML director general Paul Smee said: “The regulator, mortgage lenders and the CML are collaborating very effectively so far to help interest-only borrowers manage their loans and avoid surprises when their loans mature. This work will continue, not just over the next year but over the long term.
“For the minority of borrowers who cannot reach full repayment by maturity, lenders are fully committed to helping customers reach the best outcome available for their circumstances.
“Other steps are possible – perhaps releasing equity through a lifetime mortgage, downsizing, or selling and moving into rented accommodation, and our continuing programme of contact should help borrowers identify and implement what works for them.”
But challenger bank Aldermore believes interest-only borrowers are still trapped by a lack of mortgage products.
Charles Haresnape, managing director, residential mortgages at Aldermore, said: “It is good news that customers are taking appropriate actions to manage their interest-only mortgages, but it remains problematic for borrowers who are suited to interest-only new deals to find lenders willing to lend on that basis.
“Potentially hundreds of thousands of people are trapped on these mortgages with nowhere to go, since many lenders ran for the hills when the regulator took a tough stance on this.
“The reality is, these products are well suited to certain groups of homeowners and potential homeowners, such as junior doctors for example, who may be on a low income now, but have a high projected income in the future. We need more lenders to enter the interest-only market, to ensure consumers are getting sufficient choice and are made aware of all the options, when looking to remortgage.”