MortgagesMay 15 2017

Scale of interest-only mortgage nightmare shrinks

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Scale of interest-only mortgage nightmare shrinks

The number of residential interest-only mortgages outstanding has fallen to less than two million, according to the Council of Mortgage Lenders.

This accounts for 21 per cent of all home-owner mortgages.

In 2012 there were 3.2 million of these mortgages and this accounted for a third of the total residential mortgage stock.

There are predicted to be around 40,000 interest-only mortgages reaching maturity each year between 2017 and 2032.

The CML’s James Tatch said: “With five years worth of data showing steady improvement, you could make a decent case for now calling this success.

“But, with 1.9 million interest-only loans still remaining, we would rather say ‘so far, so good’.

“And with a third of the interest-only book not due to mature until the 2030s, it is crucial we continue our commitment to managing developments to deliver the same positive outcomes, so we report the same sort of progress every year.”

One of the reasons for concern which Mr Tatch highlighted was the stubborn nature of some of the riskiest loans.

There are currently 11,000 loans at more than 75 per cent loan-to-value with two years or less to run.

While this segment has shrunk by around 7 per cent, the rate of reduction is slower than for 25 per cent LTVs with longer maturities.

Mr Tatch said this meant the industry would continue to contact borrowers.

He said: “Overall, lenders initiated a little over half a million interest-only borrower contacts last year, around a third of which were to borrowers with short maturities (occurring up to 2020 or before).

“As in previous years, response rates were relatively low but the best success – 20 per cent – was for these short maturities. Of these, more than four in five borrowers had repayment plans in place.

“The higher success rate for these short maturities is likely to reflect the risk-based segmentation approaches that many lenders use, directing more of the available resource to those borrowers with the more pressing timelines or other risk factors.”

Ray Boulger, a mortgage expert at John Charcol, said he was optimistic about the way the interest-only mortgage issue would play out.

He said: "A lot of people will be bailed out by the rise in house prices and the large fall in long-term interest rates. For those who have simply kept their mortgage where it is and not borrowed more money they will have the opportunity to refinance on a lifetime mortgage."

damian.fantato@ft.com