Warning on sharp rise in interest-only mortgages

Warning on sharp rise in interest-only mortgages

A steep rise in the number of interest-only mortgages issued in 2017 poses a “systemic risk” to the health of the economy, according to a former economist at the Bank of Ireland.

Laurence Sanders was commenting in light of a report from the Bank of England which revealed a marked per cent increase in interest-only mortgages over the past year.

Data from the Bank of England showed a 45 per cent increase in the number of interest-only mortgages issued in the third quarter of 2017, as compared with the same period in 2016.

The central bank said the mortgages are largely being issued to higher earners and at conservative loan to value ratios which means the borrowing is, in the view of the Bank, being used as a cheap source of debt for high earners, rather than solely for a house purchase.

A blogpost by Sachin Galaiya, who works in the retail credit risk department of the central bank, stated interest-only mortgages accounted for only 7 per cent new lending in the mortgage market in 2016, compared with 42 per cent in 2007 when the product allowing people to pay off just the interest and not the capital of huge property-backed borrowings helped fuel a housing boom ahead of the 2007-09 financial crisis.

But as the Bank said the increase in 2017 is the result of more lenders entering the market, Mr Sanders branded interest-only mortgages "a systemic risk".

"Aggregate data - the most recent figure being 9 per cent of mainstream regulated lending in 2017 - hides the probability that some mortgage lenders have a much higher percentage of interest-only mortgage lending in their new business portfolio.

"A significant number of mortgage lenders also have a substantial portfolio of interest-only mortgages written at the height of the mortgage lending boom, prior to the great financial crisis.”

Mr Sanders said interest-only mortgages should only be allowed to account for about 5 per cent of total mortgages, particularly if the loan to value of the mortgage is less than 50 per cent.

He said: “There is a legitimate market for interest-only mortgages. Mortgage underwriters and financial regulators must be able to rigorously quantify the risk inherent in interest-only mortgage business. Capital adequacy prudential requirements should fully reflect the increased risk.

"Any pressure from powerful financial institutions must be resisted. There must be no return to the softer touch regulation and underwriting criteria of the early years of the 21st century.”

But mortgage brokers said the increase in interest-only mortgages did not signal a repeat of the problems that contributed to the financial crisis of 2007.

David Hollingwoth, associate director for communications at London and Country Mortgages said “the increase in 2017 is coming from a very low base. It is a natural correction”.

Ray Boulger, senior technical manager at John Charcoal, said there are a lot of firms who still don’t offer the product.

"But recently more providers have come into the market and more people qualify. The criteria that lenders have, in a lot of cases have been tweaked, or the loan to value requirements have been relaxed, but the increase we have seen is coming from such a level I’m not sure its massively significant.”