UK lenders exposed to huge interest only mortgage risk, research suggests

Some 1.3 million interest only mortgages are due to mature by 2020 and 1.04 million have no final payment plan with 21,000 already under forbearance meaning that repossessions are likely to increase, the research suggests. The research carried out by xit2, the survey, valuation and asset management data exchange specialists, also shows that 14% of total house purchases loans over the last decade are interest only with no final payment plan. The large block of outstanding balances is a legacy of the high number of interest only mortgages granted prior to the financial crisis. So, despite lenders acknowledging the problem and cutting their interest-only lending over the last few years, the outstanding balance of interest only mortgages hasn’t been significantly reduced. The firm’s analysis of interest only has found the bulk of those mortgages date back to before the financial crisis, when the market had easier access to credit. Outstanding mortgage balances have doubled since 2002, rising from £626 billion to £1.25 trillion as of the second quarter of this year. During that time interest only mortgages with no repayment vehicle have accounted for an increasingly large percentage of overall annual lending, hitting a peak between 2005 and 2008. In 2002, interest only loans with no repayment plan accounted for 12% of new house purchase loans granted that year. By the start of 2008, just before the financial crisis, that figure had risen to 30%. The bulk of these interest only loans were granted in the mid-2000s, and are due to mature in the next eight years. With the economy in a weak state, and savings rates at rock bottom, lenders will be concerned borrowers on interest only mortgages with no specified payment plan have no means to repay their outstanding balances. ‘The interest only problem is a big structural issue for lenders. The Mortgage Market Review has highlighted interest-only as an area that needs special attention. And no wonder. The big block of outstanding balances which are due to mature over the next eight years is a legacy of unsustainably high interest only lending prior to the financial crisis,’ said Mark Blackwell, managing director of xit2. ‘If lenders fail to help these borrowers find a repayment vehicle, it will come back and give them a nasty bite around 2020 when the big batch of high LTV interest only loans granted in the mid-2000s mature. Some 80% of these borrowers have no repayment plan. Plenty of those will be families on tight monthly budgets, with low household earnings and little to no life savings. With the economy limping rather than running, many of these borrowers won’t be able to pay off their mortgage before it matures and will be stuck in arrears,’ he explained. He also pointed out that the likely prospect of a rise in the base rate only adds to the problem. Mortgage rates have nosedived since 2008, and to some extent that has hidden deep seated problems in the finances of customers on interest only. ‘Once the base rate does go up, plenty of these borrowers won’t be able to afford the sharp increase in their monthly repayments, and it could well tip more of them in serious arrears. It’s a big problem for lenders,’ he said. ‘Also if lenders fail to identify these struggling interest only customers and fail to find them a suitable repayment plan, they will come under withering criticism for failing to treat their customers fairly,’ he added. Over the last few years banks and mutuals have grasped the extent of the problem and scaled back their interest only lending. Between the second quarter of 2011 and the second quarter of 2012 interest only represented 10% of all new house purchase loans, although four fifths of these still had no specified repayment plan.