Interest-only picture improving, says CML

Interest-only picture improving, says CML

The number of interest-only mortgages in the UK have fallen by a third since 2012, as increasing numbers of borrowers pay off their home loans early, according to data from the Council of Mortgage Lenders.

At the end of 2015, there were 1.7 million pure interest-only mortgages outstanding, with a further 500,000 on a part interest-only, part repayment basis, according to the latest CML data.

This represents a fall of almost one-third in the interest-only stock since 2012.

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The CML’s analytics manager James Tatch said the decline in loans outstanding each year is heavily driven by how many loans are set to mature in that year, but noted only around a third of the decrease last year came from scheduled maturities.

He said: “In some cases, the borrowers will now be mortgage-free, either trading down or paying off in full from savings or other sources. But where they took out a new mortgage on redemption, our research suggests that, in most cases, this was on a repayment basis, rather than a new interest-only loan to replace the old one.”

The CML’s update on how the stock of existing interest-only mortgages is evolving laid out a positive picture of progress.

When the lender’s group first began collecting data in 2012, a stock of some 3.2 million interest-only loans came with sparse information on how these borrowers intended to repay at the end of the term, according to the body.

Since then, CML stated its members have proactively contacted interest-only borrowers and explored options where there may be difficulties in repaying the loan. The Financial Conduct Authority has endorsed the industry’s approach, calling it “a prime example of a model demonstrating good conduct outcomes and putting customers first”.

In 2014, the CML showed that the industry had made good on an initial commitment to this contact programme, with the intention to cover all borrowers with interest-only loans maturing on or before 2020.

According to Saga, there are about 600,000 interest-only mortgages set to mature in 2020, with an estimated 10 per cent of mortgages having no repayment plan in place.

Adviser view

David Hollingworth, a mortgage adviser with London & Country Mortgages said:

“Interest only has often been referred to as a “ticking timebomb” but this work suggests that borrowers do understand what they have and how the mortgage works.

“Brokers will of course play a key role in that process but will have also found that, increasingly, interest only borrowers have found their choice restricted by the much tougher criteria around acceptable repayment vehicles.”

For more on how the interest-only market has changed, read our recent guide and claim one hour’s CPD time.