The overall stock of outstanding interest-only mortgages fell by 15% in 2021, compared to the end of 2020, according to UK Finance’s interest-only mortgage data.
The data showed that a concerted industry strategy to manage and decrease the size and risk profile of the interest-only book has seen it reduce by over two thirds since 2012.
In 2012, there were 3.2m interest-only mortgages outstanding but 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.
At the end of 2021 where there were 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.
In addition to the 1.1m 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.
Maturities that are set to mature over the next two years are now only around a third of the number they were in 2012.
UK Finance says that the 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 comments.
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 loan-to-value (LTV) on outstanding interest-only mortgages has fallen.
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.
UK Finance says while the improvements are good news, there are still one million interest-only loans outstanding, and the communications programme will remain in place as this stock is managed down to the final maturities in the 2030s.
“The interest only stock looks in good shape to continue on the path it has followed for the past ten 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,” it comments.
Commenting on the latest data, LiveMore chief executive Leon Diamond says: “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.”
“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 adds.