Interest-only time-bomb has eight years on the clock

Sarah Davidson

September 20, 2012

Data exchange firm Xit2 claims of the 11.24 million outstanding mortgages in the UK, almost one in ten (9.3%) is an interest-only loan with no repayment plan.

This accounts for around £116bn of the £1.25tr in outstanding mortgage balances.

Since 2002, there have been 1.28 million interest-only loans granted for house purchase loans which have no repayment plan. This represents 14% of total house purchases over the past decade.

In 2002 interest-only loans with no repayment plan accounted for 12% of new house purchase loans granted that year. By the start of 2008 that figure had risen to 30%.

The bulk of interest-only loans were granted in the mid-2000s and are due to mature in the next eight years.

Mark Blackwell, managing director of xit2, said: “The interest-only problem is a big structural issue for lenders. The Mortgage Market Review has highlighted interest-only as an area that needs special attention. And no wonder.

“If lenders fail to help these borrowers find a repayment vehicle, it will come back and give them a nasty bite around 2020 when the big batch of high-LTV interest-only loans granted in the mid-2000s mature. 80% of these borrowers have no repayment plan.

“Plenty of those will be families on tight monthly budgets, with low household earnings and little to no life savings. With the economy limping rather than running, many of these borrowers won’t be able to pay off their mortgage before it matures and will be stuck in arrears.”

In 2008, interest-only accounted for 30% all house purchase loans. Two-thirds of those have no repayment vehicle in place.

Since then, this number has fallen steadily as banks attempt to reduce their exposure to interest-only loans.

Between Q2 2011 and Q2 2012 interest-only represented 10% of all new house purchase loans, although four-fifths of these still had no specified repayment plan.

Blackwell added: “Lenders have acknowledged the severity of the problem over the past twelve months, and have tightened up lending criteria on their interest-only mortgages. But they’re just closing the door after the horse has bolted.

“The challenge they have is to identify struggling borrowers and make sure they are aware of the problem. This will help lenders meet their TCF obligations.”

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