Scale of interest-only mortgage crisis revealed

Scale of interest-only mortgage crisis revealed

The number of interest-only mortgages have almost halved in the past six years but there are still 1.7 million loans outstanding, according to the latest figures by UK Finance.

The number of outstanding interest-only mortgages is down 46 per cent since 2012, UK Finance data revealed.

The total value of the interest-only mortgage book is £250bn, which is down 37 per cent in the same period.

Jackie Bennett, director of mortgages at UK Finance, said: "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.

"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."

Her comments came after at the start of this year, the FCA reported nearly one in five mortgage customers have an interest-only mortgage and the watchdog revealed it was concerned that shortfalls in repayment plans could lead to people losing their homes.

As part of its thematic review into the fair treatment of existing interest-only mortgage customers the FCA found that, although mortgage lenders are writing to customers prior to their mortgage maturing, engagement rates with firms are low.

The FCA review covered 10 lenders who represent around 60 per cent of the interest-only residential mortgage market and looked at how lenders are treating these customers to help ensure their mortgages are repaid at maturity. 

Jonathan Davidson, executive director of supervision for retail and authorisations at the FCA, said: "We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons. 

"We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take."

UK Finance's analysis also found there were 1.293 million pure interest-only homeowner mortgages outstanding at the end of 2017, which is a 14.9 per cent fall over the last year. 

However, there were 429,000 partial interest-only homeowner mortgages outstanding at the end of 2017 – marking a 2.1 per cent increase over the last year.

The number of interest-only loans with higher loan-to-values (LTVs), which is anything greater than 75 per cent, fell by 13.9 per cent in 2017.

This mean loans at these higher LTVs now make up 13 per cent of the total, compared with 16 per cent in 2016 and 36 per cent in 2012.

Jonathan Harris, director of mortgage broker Anderson Harris, said: "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.

"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.