One year on from the agreement between the CML and the FCA, for lenders to contact all borrowers with interest-only mortgages due to mature before the end of 2020, the CML is able to report a significant reduction in outstanding interest-only mortgage debt. People are clearly taking action to reduce the risk of not being able to repay their loan when it matures.
Based on a CML survey representing around 96% of the market, at the end of 2013 there were an estimated 2.2 million pure interest-only loans outstanding, and a further 620,000 part interest-only, part repayment mortgages outstanding on lenders' books. Compared to 2012 this represents a fall of around 300,000 pure interest-only mortgages (down 12%), and around 90,000 part-and-part mortgages (down 13%).
Reassuringly, there has also been a positive set of changes in the loan-to-value profile of outstanding interest-only mortgages. Two-thirds of outstanding interest-only mortgages have loan-to-value (LTV) ratios of less than 75% - and the vast majority of these are not due to mature until after 2020.
The chart shows that a large number of loans would have moved into a lower LTV band as a result of house price inflation alone. However, it also shows that borrowers are taking additional action to reduce their mortgage balances, as the effect of house price inflation alone would not have resulted in the improvements in outstanding LTVs that have been seen over the past year. Indeed, the number of loans in every LTV band below 75% would have seen an increase on the basis of house price inflation alone (as loans moved down from higher LTV bands) - but, in fact, every band saw a decrease.
Changes in interest-only loans outstanding, September 2012-December 2013, by LTV
View chat here (http://www.cml.org.uk/cml/media/press/3890).
Lenders have been undertaking a variety of activities to encourage their customers to take positive action to manage their interest-only mortgages. Through letters, telephone contact, online information, and some face-to-face communications, lenders are seeking to help customers take whatever actions best serve their long-term interests. Although there is likely to be a cohort of borrowers who may still find it difficult to put in place adequate plans to repay their interest-only mortgages in full and on time, the number of such borrowers is likely to be relatively modest.
CML director general
"The regulator, mortgage lenders and the CML are collaborating very effectively so far to help interest-only borrowers manage their loans and avoid surprises when their loans mature. This work will continue, not just over the next year but over the long term.
"For the minority of borrowers who cannot reach full repayment by maturity, lenders are fully committed to helping customers reach the best outcome available for their circumstances. Other steps are possible - perhaps releasing equity through a lifetime mortgage, downsizing, or selling and moving into rented accommodation, and our continuing programme of contact should help borrowers identify and implement what works for them."
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