Number of interest-only mortgages falls sharply

The volume of interest-only mortgages has fallen significantly since 2012, according to the Council of Mortgage Lenders (CML).

Fresh data shows that there were in the region of 3.2m interest-only loans in 2012, when the CML started collecting data, but that figure has dropped to around 1.7m, with a further 500,000 loans being part-and-part.

Regulatory clampdown has made it more difficult for homebuyers to get interest-only home loans, otherwise deemed too risky for regular homebuyers, but generally still available to landlords, while lenders have been actively tackling the issue head-on by proactively contacting interest-only borrowers and exploring options where there may be difficulties in repaying the loan.

Many lenders also appear to have been steering borrowers away from interest-only when remortgaging comes around.

A significant proportion of the fall came from loans being paid off, which suggests that deliberate remortgaging played a large part.

The CML said that 29% of total redemptions were from loans due to mature from 2028.

James Tatch, analytics manager at CML, commented: “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.”

“Another trend we have seen is the overall profile of the remaining interest-only stock becoming progressively lower-risk each year, in terms of borrowers’ debt relative to property value,” he added. 

With targeted interest-only contact strategies now a permanent feature of lenders’ back-book management, “we see this positive story continuing, according to Tatch. But he warned that it is vital that those borrowers still with interest-only mortgages “engage with lenders” at each point of contact, to ensure that any “risks are identified and managed at the right stage”.

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