Interest-only mortgage count halves in six years

Michael Lloyd

May 17, 2018

The number of interest-only mortgages has almost halved in the past six years, UK Finance figures reveal.

There are currently 1.7 million outstanding interest-only mortgages (including partial interest-only), down 46% since 2012, when this data was first collected. The total value of the interest-only mortgage book is £250bn, down 37% in the same period.

Jonathan Harris, director of mortgage broker Anderson Harris, said: “It is no surprise that the number of interest-only mortgages has halved in the past six years.

“Following the extravagant lending policies of the early 2000s, there was a backlash against interest only following the credit crunch.

“As lenders pulled out of the market, this sentiment was reinforced by the Mortgage Market Review in 2014.

“The FCA provided guidance on responsible lending, one major aspect of which was the need to have a viable repayment strategy in place for interest-only loans.”

Harris added: “These factors have driven down volumes of interest-only lending. It still has a place in the market but is rightly restricted to those who are genuinely in a position to repay the capital from credible sources.

“Borrowers who have an interest-only mortgage and are concerned as to how they are going to pay it back should speak to their lender, rather than burying their heads in the sand. There are solutions and the sooner you address the issue, the better.”

There were 429,000 partial interest-only homeowner mortgages outstanding at the end of 2017, a 2.1% rise over the last year.

The number of interest-only loans at higher (over 75%) loan-to-values fell by 13.9% in 2017. Loans at these higher loan-to-value ratios (LTVs) now make up 13% of the total, compared to 16% in 2016 and 36% in 2012.

Russell Quirk, founder and chief executive of Emoov.co.uk, said: “In the current market conditions, it’s encouraging to see that first-time buyers are finally getting their own back on the buy-to-let sector.

“While a slow in price growth has seen many remain sat on the fence, the nation’s aspirational (young) buyers clearly remain undeterred.

“In fact, with no existing property to worry about and a slow in the rate of unaffordability, first-time buyers seem to be flourishing in the current, cooler market.

“When you couple this with the low cost of mortgages at present and the stamp duty reprieve for those buying under £300,000, the result is this upturn in transactional volume.”

There were 1,293,000 pure interest-only homeowner mortgages outstanding at the end of 2017, a 14.9% fall over the last year.

Separate analysis by UK Finance reveals that of the one million interest-only loans due to mature by 2020 that were live at the end of 2012, only around 200,000 now remain.

Whilst making contact with borrowers who are more reluctant to engage remains a challenge, there is also evidence that lenders are seeing greater success here, and the vast majority of borrowers who do engage have repayment plans in place.

Jackie Bennett, director of mortgages at UK Finance, said: “The number of outstanding interest-only loans has halved in the past six years, with a particularly steep decline in higher loan-to-value mortgages.

“Many borrowers continue to redeem ahead of schedule or switch to a repayment mortgage.

“However, there remains plenty more work to do over the coming years to ensure that those remaining borrowers who have so far been reluctant to engage have viable repayment plans in place.

“We continue to encourage all borrowers with interest-only mortgages to contact their lender as soon as possible, as the sooner they do so the more options will be available.

“UK Finance will also be developing new best practice for lenders in this area, to reflect the changing regulatory landscape and help the industry engage successfully with more borrowers.”

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