Number of outstanding interest-only loans continues to fall

The number of outstanding interest-only mortgages fell 15% in 2021, today's UK Finance annual update has revealed.

Related topics:  Mortgages,  Interest-only
Amy Loddington
23rd May 2022
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"This accelerated volume of redemptions has been greatly helped by the industry’s communication programme"

Compared with the position at the end of 2020, outstanding interest-only loans fell 15% in 2021, and has reduced two thirds since the industry body started collecting data in 2012.

Ten years ago, 3.2 million interest-only mortgatges were outstanding causing significant concern about consumers' means to repay - but a concerted effort across the industry to discuss repayment has seen that figure reduce dramatically to just 745,000 pure interest-only loans at the end of 2021 and a further 252,000 on part interest-only.

This represents a continued downward trend in the size of the outstanding interest-only loan book, many of which are being redeemed ahead of schedule.

The report notes:

"This 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."

"Some borrowers will have redeemed in full, which is most likely for the earliest maturities where the balances are relatively small. Others will have remortgaged onto full or part repayment terms or, for some older interest-only customers where this is the most suitable option, onto a lifetime or retirement interest-only mortgage (neither of which are included in these figures)."

"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 (around ten per cent according to the Nationwide index), the typical LTV on outstanding interest only mortgages has fallen. With this, the risk to borrowers and lenders has also been reduced should repayment be an issue. In particular, 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."

"Although these improvements remain a good news story, 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."

Leon Diamond, CEO at LiveMore commented on the figures:

“Although the amount of new interest-only mortgages taken out in 2021 is small at 3% of total lending (32,000 loans), there is still a place for this type of loan.

“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.”

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