Property news: Interest-only mortgage warning heeded

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One year on from the agreement between the Council of Mortgage Lenders and the Financial Conduct authority, for lenders to contact all borrowers with interest-only mortgages due to mature before the end of 2020, the CML is able to report a significant reduction in outstanding interest-only mortgage debt. People are clearly taking action to reduce the risk of not being able to repay their loan when it matures.

Based on a CML survey representing around 96 per cent of the market, at the end of 2013 there were an estimated 2.2 million pure interest-only loans outstanding, and a further 620,000 part interest-only, part repayment mortgages outstanding on lenders’ books. Compared to 2012 this represents a fall of around 300,000 pure interest-only mortgages (down 12 per cent), and around 90,000 part-and-part mortgages (down 13 per cent).

Reassuringly, there has also been a positive set of changes in the loan-to-value profile of outstanding interest-only mortgages. Two-thirds of outstanding interest-only mortgages have loan-to-value (LTV) ratios of less than 75 per cent - and the vast majority of these are not due to mature until after 2020.

The chart shows that a large number of loans would have moved into a lower LTV band as a result of house price inflation alone. However, it also shows that borrowers are taking additional action to reduce their mortgage balances, as the effect of house price inflation alone would not have resulted in the improvements in outstanding LTVs that have been seen over the past year. Indeed, the number of loans below 75 per cent would have seen an increase.

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