The Council of Mortgage Lenders (CML) has reported that over the past two years, the total number of interest-only loans outstanding has fallen by over a quarter, with a 16% reduction in the number of loans over the past year alone.
At the end of 2014, CML members reported that there were around 1.9 million pure interest-only mortgages outstanding, and around 460,000 part interest-only mortgages. This was around 300,000 fewer pure interest-only mortgages and 160,000 part interest-only mortgages than a year earlier.
The CML said a quarter of this reduction is down to natural attrition (loans maturing and repaying at the end of their term). Around a third can be attributed to full redemption of loans not set to mature until at least 2028 – suggesting that many borrowers are taking action well before problems could arise, the trade body said. This also suggests that a significant group of borrowers are successfully remortgaging onto full repayment terms without falling foul of new affordability rules, it added.
Of those loans that have matured, few have failed to repay. In total, there are fewer than 16,000 loans outstanding which have matured but not yet repaid or restructured – and previous experience shows that most such loans subsequently redeem within a relatively few months of maturity.
The CML said its members are continuing to think about the options for customers who may not be able to repay their mortgages. This includes more partnering with third-party advice providers, including equity release firms, and product innovations that may help some borrowers.
It admitted that it remains a challenge to get borrowers to respond to lender contact designed to help them plan for their mortgage’s repayment at maturity. Lenders contacted around 427,000 interest-only customers between April and December 2014 (about 17% of all interest-only borrowers). During 2014, the focus of lender communications moved beyond those whose mortgages are due to mature by 2020, and included borrowers whose mortgages are not due to mature until after this.
Response rates by borrowers varied. Around 27% of those contacted whose mortgages are due to mature between 2021 and 2028 responded , but only 2% of those whose mortgages are not due to mature until after 2028 did. However, where lenders did succeed in getting customers to respond, 86% of those who responded had a repayment strategy, and those who did not appeared responsive to making changes (such as switching to repayment terms, overpayments and term extensions).
This, the CML said, suggests that the main practical focus for lenders needs to remain on getting customers to engage with them and discuss their plans. The CML said it will try to help lenders develop approaches to customer contact strategies that most encourage customers to respond.
CML director general Paul Smee said: “The continued decline in interest-only mortgages outstanding confirms our perception that many borrowers are firmly on top of this issue, and successfully making plans to manage their loans to ensure they are not faced with a payment shortfall at maturity.
“But as an industry we clearly still have work to do to trigger more borrowers to respond to their lenders’ attempts to understand their intentions and help them plan ahead for the maturity of their loans.”