Many borrowers continue to repay on or ahead of time
The stock of outstanding interest-only mortgages fell by 15% annually in 2021 as a result of a concerted industry strategy to manage down the size and risk profile of the interest-only book, UK Finance has reported.
According to the trade body for the UK banking and financial services sector, the strategy has seen the stock reduce by over two-thirds since 2012, when it first started collecting these data.
UK Finance released its latest annual update of data on the size and profile of the stock of outstanding interest-only mortgages, on Monday.
The total interest-only mortgage stock (including part and part) has reduced by 69% in number, and 56% in value since a decade ago.
“Back in 2012, with 3.2 million interest-only mortgages outstanding, the risk that customers could reach the end of their term without the means to repay posed a significant industry risk, albeit a hypothetical one given there had been no material evidence of such end-of-term defaults to date,” the trade association said in its report.
“Since 2014, the lending rules put in place by the Financial Conduct Authority (FCA) mean that new interest-only lending, while still permitted, accounts for only a small minority of activity. Just 32,000 interest-only loans were advanced in the last year – less than 3% of total lending,” it added.
Leon Diamond, chief executive at LiveMore, remarked that while the amount of new interest-only mortgages taken out in 2021 was small at 3% of total lending, there is still a place for this type of loan.
“There are one million interest-only loans outstanding, and some borrowers will be unable to repay the capital when their mortgage matures. They are likely to be over 50 years of age and this area of the mortgage market is very underserved. People may feel their only option is to sell but they could take out another interest-only mortgage to pay off the first one,” Diamond said.
UK Finance said the industry has undertaken a collaborative communications program, reaching out to all interest-only customers to discuss repayment plans and make sure they are on track to repay. This program, continually reviewed and refined by lenders, has created an ongoing dialogue, and helped minimise any repayment risk.
“As a result of these concerted efforts, by the end of 2021, there were just 754,000 pure interest-only mortgages outstanding in the UK, and a further 252,000 on part interest-only, part repayment terms, reductions of 17% and 9% respectively compared with 2020,” the report further revealed.
Many borrowers continue to redeem their interest-only mortgages ahead of schedule. This continues an uninterrupted downwards trend in the interest-only book size seen over the past 10 years, with the reductions well ahead of the maturity schedule.
In addition to the 1.1 million interest-only loans that have matured on or ahead of schedule between 2012 and 2021, there are also more than a million fewer interest-only mortgages still yet to mature than there were in 2012.
The closest maturities – those set to mature over the next two years – are now only around a third of the number they were in 2012. Even those set to expire over a decade from now have reduced by one third.
“This accelerated volume of redemptions has been greatly helped by the industry’s communication programme. Even where borrowers do not respond directly, the contact will have nonetheless prompted many customers to look at their situation, and take action if required,” UK Finance stated.
“Some borrowers will have redeemed in full, which is most likely for the earliest maturities where the balances are relatively small. Others will have remortgaged on to full or part repayment terms or, for some older interest-only customers where this is the most suitable option, on to a lifetime or retirement interest-only mortgage,” it continued.
In addition to the reduction in numbers, the risk profile of the outstanding stock of interest-only mortgages has also continued to improve.
Helped in part by a year of strong price growth, the typical LTV on outstanding interest-only mortgages has fallen. With this, the risk to borrowers and lenders has also been reduced should repayment be an issue.
There are now only 51,000 pure interest-only mortgages outstanding at over 75% LTV, down 41% from the number just one year ago, and 94% fewer than the 900,000 at these higher LTVs in 2012.
“Although these improvements remain a good news story, there are still one million interest-only loans outstanding, and the communications program will remain in place as this stock is managed down to the final maturities in the 2030s,” UK Finance said.
Additionally, the number of interest-only loans set to mature by 2027 shrank by 123,000 in 2021 to 334,000 loans, a fall of 26.9%.
Notwithstanding the ongoing improvements, a small number of interest-only mortgages do not repay immediately on maturity in each year. However, data indicates that most of these do in fact repay shortly after, most commonly within six months, and only a small number need longer or require tailored assistance.
“As we take into account all of a customer’s income, including pensions, investments and any other assets, many people will find they are eligible for a mortgage after all,” Diamond said.
The trade group concluded that, overall, the interest-only stock looks in good shape to continue on the path it has followed for the past 10 years, with borrowers repaying their mortgages on time or before.
“However, for those customers who are unsure whether they will be able to repay, it is vital that they contact their lenders at the earliest opportunity, so that they can explore the best options to repay at an early stage,” UK Finance said.
