When we last blogged on the outlook for customers with interest-only mortgages, 2020 had barely begun. Although final figures for 2019 were not yet available, we were setting the scene for a further year of ?new normal? in this largely historic portion of the market. That is, an expected further steady contraction in the size of the outstanding book, with those loans remaining maturing further into the future and with lower loan to value.

Since then the spread of Covid-19 and the economic consequences of lockdown have eclipsed most, if not all, other concerns in financial services. In particular in the mortgage space, with 1.9 million customers taking a Covid-19-related Payment Deferral, it has become even more important to understand the profile and risk characteristics of the existing mortgage customer base, as millions of homeowners have found themselves under unforeseeable financial stress.

Against this backdrop the figures we released today, confirming our expected improvements in the shape and profile of the interest-only book, are largely good news.

At the end of 2019 there were some 1.3 million interest-only homeowner mortgages outstanding in the UK. That's around ten per cent fewer than at the end of 2018, and almost 60 per cent fewer than the 3.2 million outstanding in 2012, when we first started collecting this data (Chart 1).

Source: UK Finance

Notes:

1. Data relate to homeowner mortgages only, BTL loans are not included
2. Part and part mortgages are those where the borrower is paying interest only on one part of the mortgage balance and the remainder on a repayment basis

The risk profile of the back-book has continued to improve as well, with the largest reductions seen amongst those loans with relatively high current Loan-to-Value ratios ((LTVs).  There were 111,000 pure interest-only loans outstanding in December with current LTV over 75 per cent, compared to 150,000 at the end of 2018, and over 900,000 in 2012. The significant 26 per cent year-on-year reduction in these higher-LTV loans last year comes in a year when house price inflation was relatively modest (1.1 per cent as measured by HM Land Registry data). This indicates that, with house price increases contributing only a marginal uplift in equity stakes, positive actions by customers, helped by  pro-active communication strategies by lenders, have continued to help move those at potentially higher risk either down the risk curve (by paying down some of the capital) or, by redeeming in full, out of the interest-only book entirely.

Source: UK Finance

Notes:

1. Data relate to homeowner mortgages only, BTL loans are not included
2. Part and part mortgages excluded from these data for ease of interpretation

Greater reductions were also seen amongst loans maturing sooner. The 57 per cent fall in loans maturing on or before 2020 largely reflects the fact around half of these would have been 2019 maturities which matured and, in most cases, redeemed on time and in full. However, the seven per cent reduction in loans maturing over the next few years (between 2021 and 2027) is a further good news story, particularly against the backdrop of the challenging economic environment now facing us.

While we do not have precise figures, our internal analysis indicates that interest-only customers are proportionally somewhat less likely to have taken a Covid-19-related Payment Deferral. This is somewhat intuitive, given that they will typically have lower monthly payments and are therefore less likely to need help meeting those payments.  Beyond this though, our data released today shows that far fewer interest-only customers now have higher LTVs, and the majority do not come to maturity for some years. So, those interest-only customers who have needed to take a Payment Deferral will typically have comfortable equity cushions that should not be significantly eroded by the capitalised deferred payments, should the customers choose that route to repay.

As with the wider mortgage market and, in fact, all households, interest-only customers are managing their household finances through a hugely uncertain and, for many, adverse economic environment. In these circumstances, it is a good news story that the much- reduced interest-only mortgage population is in a good position to weather the storm.  However, there will be some customers who need further support and lenders stand ready to offer that support, either through further deferred payments which are available until the end of October or individual consideration of customer circumstances if repaying the capital at the end of the term is problematic.