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Interest-only cloud lifting – CML

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  • 15/05/2017
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Interest-only cloud lifting – CML
Interest-only mortgages continue to shrink in quantity and value with 40% having been vacated in the last five years; increasingly common among borrowers with longer loan terms remaining.

The Council of Mortgage Lenders (CML) said it was encouraged by the results of its enquiry into the market and it was a case of “so far, so good” on industry initiatives to tackle the issue.

Some of the biggest falls were in the number of mortgages at higher loan-to-value (LTV), however, the body warned there was still a pocket of high-risk customers due to mature shortly.

“Of most immediate importance, there are 11,000 loans at over 75% LTV with two years or less to run,” it said.

“Although this segment has shrunk in size, the rate of reduction has been slower than for high LTV at longer maturities. With at most two years to run, inflation can do little to improve the equity position for these loans.

“Even though this segment represents less than 1% of the book, it is the highest risk – at least with respect to impending maturity and high leveraging. It is, then, crucial that these borrowers either have adequate provision to repay their loans or act now to improve their position,” it added.

 

Continued decline

Overall, the CML analysis showed at the end of 2016, the interest-only stock had fallen to 1.9 million loans (down from 3 million in 2011), accounting for 21% of all home-owner mortgages, with “four years of fairly steady decline, at a rate of between 10 and 13% a year”.

It also noted that even when a mortgage was not repaid immediately on the due date, in the majority of cases it was redeemed in full shortly afterwards by the borrower.

The interest-only sector is also becoming increasingly a closed book, with less than 2% of new house purchase loans taken out on an interest-only basis, compared to a peak of nearly 40% in 2007.

“It is, then, an encouraging result that nearly half of last year’s decrease in the book came from loans not set to mature until at least 2028,” the report continued.

“This contrasts sharply with previous years, where the majority of the decrease in stock came from loans redeeming on maturity.”

It appears likely that many of the redemptions of interest-only, particularly at longer maturities, are through remortgaging or switching to repayment terms.

 

Last week’s Marketwatch experts discussed how they were advising clients with maturing interest-only mortgages.

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