Your IndustryMay 26 2016

How the interest-only mortgage market has changed

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How the interest-only mortgage market has changed

Interest-only mortgages were created originally as a niche, more flexible mortgage product, but became all the rage in the late 1980s and 1990s as inflation and interest rates rose exponentially.

By 1990, inflation was peaking at 9.5 per cent - pushing up the cost of goods and services - and interest rates were hitting 14 per cent. This meant ordinary Britons could not face having to pay huge mortgage bills each month.

Straight repayment mortgages were out of favour and interest-only mortgages were in, as the key benefit of interest-only mortgages is they allow the borrower to defer capital repayments, paying off just the interest each month. The remainder is due at the end of the mortgage term.

Data from the Council of Mortgage Lenders reveals in 1988, there were 532,800 interest-only mortgages sold, equating to 80 per cent of all mortgages, compared to zero in 1978.

Fast-forward to 2016, however, and it seems first-time buyers are lucky to even see documents about existing interest-only mortgages let alone opt for this type of deal.

The market for interest-only mortgages has changed drastically, but it has now come to rest in probably the right place Andrew Montlake

CML figures show since February 2015, just 400 interest-only mortgages have been opted for by first-time buyers. In February 2016, no interest-only mortgages were arranged.

CML Regulated Mortgage Survey. Repayment methods for first-time buyers, new mortgages

Capital & InterestCapital & InterestInterest-OnlyInterest-Only
#%#%
2015Jan20,10010000
Feb19,70010000
Mar24,10010000
Apr23,4001001000
May23,60010000
Jun29,3001001000
Jul29,8001001000
Aug26,60010000
Sep27,9001001000
Oct30,00010000
Nov27,80010000
Dec29,50010000
2016Jan21,40010000
Feb21,90010000

The scarcity of deals isn’t limited to first-time buyers.

Even people who already had interest-only mortgages are not always able to remortgage to another interest-only product. In February 2016, only 4 per cent of all homeowner remortgages was for another interest-only mortgage, CML data reveals.

For home movers looking for a new mortgage, the numbers have been just as low, ranging from 600 to 1,000 each month since February 2015.

By way of comparison, in February 2016, interest-only loans to home owners for house purchase reached 700 loans, but capital and interest loans totalled 46,800.

At the end of December 2015, the total value of all outstanding UK regulated loans from CML members was £925.8bn. Interest-only mortgages made up just £208.1bn - just 22.4 per cent of the total market, compared with 80 per cent back in 1988.

Ticking time-bomb

So, have interest-only products fallen out of favour with borrowers, lenders or the regulator?

In spring 2012, then chief executive of the FCA, Martin Wheatley, told the Treasury select committee interest-only mortgages were a “ticking time-bomb”, with billions of pounds of lending and no discernible repayment plan.

The FCA published a review into the product a year later in 2013, and lenders started to withdraw from the market. In 2013, data provider Moneyfacts revealed just 22 mortgage providers offered the product, compared with 79 in 2007.

Add to these headwinds concerns over regulation such as the FCA’s Mortgage Market Review (MMR), which came into force in 2014, and the European Union’s Mortgage Credit Directive (MCD), from April this year, and it is understandable why we have seen huge changes in the interest-only mortgage market.

Even those who have not withdrawn have changed their terms and criteria.

Mark Howell, director of marketing and customer management for the Bank of Ireland, says: “Originally, interest-only loans would have had an endowment assigned to them as the repayment vehicle. That number is now less than 10 per cent of all new loans.

“Concerns over borrowers’ future repayment capabilities have led to interest-only being offered on stricter lending criteria than was the case pre-2008.”

Not all people see these changes negatively. Andrew Montlake, director for London-based Coreco, says: “The market for interest-only mortgages has changed drastically, but it has now come to rest in probably the right place.

“This is not a mass-market area but should be available to those with high levels of equity or deposit, access to higher incomes or bonuses, for example.”