Warnings from lenders are working in prompting interest-only mortgage borrowers to take action on their looming debt.
Interest-only mortgage debt fell significantly between the end of 2012 and the end of 2013.
That’s according to new figures published by the Council of Mortgage Lenders (CML) based on a survey of its members, which represent around 96% of the market.
At the end of 2012 there were an estimated 2.5 million pure interest-only and a further 710,000 part interest-only, part repayment mortgage loans outstanding.
But within 12 months there looks to have been a fall of around 300,000 pure interest-only mortgages (down 12%) to 2.2 million and a drop of 90,000 part interest-only, part repayment mortgages (down 13%) to 620,000.
The CML says it can’t account exactly for what happened to nearly 400,000 interest-only mortgages in this period. But it thinks action it took a year ago along with lenders and the Financial Conduct Authority (FCA) to alert borrowers with interest-only mortgages due to mature before the end of 2020 may have worked, as it coincides with the fall.
Lenders have been communicating with borrowers through letters, telephone calls, online and face-to-face meetings to warn them of the implications of the looming deadline for their debt and providing a toolkit with information on their options (such as switching onto a pure repayment mortgage, overpaying or selling up and downsizing).
In addition there also seems to be a positive shift in the loan-to-value (which represents the percentage of borrowing against the value of a property) of outstanding interest-only mortgages.
The CML said that every LTV band saw a decrease in interest-only mortgages. Two thirds of interest-only borrowers now have an LTV of less than 75%, with the vast majority of these loans not due to mature until after 2020.
[SPOTLIGHT]The fall is mainly due to positive house price inflation, but the CML said borrowers must also be taking additional action to reduce their mortgage balances as house price inflation alone wouldn’t have resulted in the improvements.
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Why is this good news?
The decline in interest-only mortgage debt is good news.
Interest-only mortgages allow borrowers to pay off just the interest on their loan each month instead of a mix of capital and interest, making the monthly repayments much lower.
This means at the end of the mortgage term interest-only borrowers need to repay the original amount borrowed in one lump sum.
Pre-credit crunch this sort of mortgage was approved without much thought about how this enormous debt might be paid off by the borrower.
Last year it was estimated that around £160 billion-worth of interest-only mortgages due to mature in 2020 have no repayment plan in place, which prompted the action by the CML, lenders and the FCA.
But another problem these sorts of borrowers face in the next few years is interest rate rises and the limited choices on new interest-only deals to switch to.
That's because a raft of lenders have been tightening the criteria for their interest-only deals or withdrawing them altogether, leaving existing borrowers with fewer remortgage deals to choose from.
Taking action on interest-only
The drop in interest-only mortgage debt is a positive sign that people are taking action. But a large number of borrowers are still on these deals.
These borrowers may have a repayment plan in place. But the CML says there is likely to be a swathe of borrowers that may still find it difficult to come up with a repayment plan in time, though it says these numbers will be modest.
If you have an interest-only mortgage and are worried about what your options are read Your options if you're struggling to pay off your interest-only mortgage and Interest-only mortgages: the banks that will still lend for some help.
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