2020 is upon us! Amongst other things this is the year when according to (then) FSA analysis from 2012 we were set to see the end of the first of three waves of maturing interest-only mortgages. It's therefore a good time to take stock and review where the industry, and its customers, have moved to since then.

Not a peak - but the first of three end points

Firstly, it's worth noting that 2020 is not a peak in interest-only maturities. Rather, as both the FSA's 2012 research and our own data (Chart 1) show, it signals the end point for maturities of the first of three different tranches of interest-only loans. Loans in this first segment were largely those taken out in the late 1980s-early 1990s, most commonly backed by an investment vehicle such as an endowment policy, ISA or pension. In fact, this wave of maturities saw its peak in 2017/2018, broadly corresponding to the peak in that historical period of interest-only lending.

Chart 1: residential interest-only mortgages outstanding by year of maturity

Source: UK Finance

A second, more important, point is that following the proactive approach taken by the industry and its customers to address potential repayment issues ahead of maturity, only half the number of loans are now set to mature this year as when we first measured this in 2012. We are currently collecting data to update this stock position as at December 2019 and expect this will show a further reduction below the 60,000 as measured at end-2018. We will publish these figures in early summer.

So far, so good then.  However, even if this has fallen as we expect, something approaching 60,000 interest-only mortgages will still mature this year. We now examine the profile of these customers, and whether this has any implications for these borrowers? ability to repay.

Profiling 2020 maturities

Our annual interest-only survey provides data on the entire interest-only back book, regardless of when it was written. As an aggregate survey, this provides invaluable high-level insight, but doesn't allow a more forensic examination of borrower characteristics. To supplement this, our Regulated Mortgage Survey (RMS) provides this level of detail but, as it covers FCA-regulated residential loans only, excludes many of the older loans in the book.

Overall, our RMS data shows around 41,000 regulated loans maturing this year, some 65 per cent of the total from our aggregate survey.  Below we draw out some of the key features of these regulated loans that will mature this year.  Readers should note that those loans which fall outside our sample will typically be older, and therefore have an lower average balance and loan-to-value (LTV), than those profiled below. The borrowers holding these loans will also have an older age profile.

Most borrowers in a strong equity position

For those 2020 maturities we can fully profile, the majority of borrowers have a low current LTV, and so are in a strong equity position. Almost half have under 25 per cent LTV, and three-quarters have less than 50 per cent (Chart 2).  These borrowers owe, on average, £104,000 but have equity of £387,000. 

Based on the experience of maturing interest-only loans to date, we can expect that the vast majority of loans maturing this year will also repay in full and either on time or within a few months thereafter. However, the greater focus is on those who may not be in a position to repay immediately. It is therefore a positive finding that three-quarters of these 2020 maturities have these very comfortable equity stakes, which offers options should they find themselves unable to repay the loan from other sources.

Chart 2: interest-only mortgages maturing in 2020, current LTV as at June 2019

Source: UK Finance

Notes:

1. Data are for residential FCA-regulated loans only.
2. 31 per cent of 2020 maturities in the data set do not have sufficient information to accurately estimate current LTV and are excluded from this analysis.

A small but significant minority cohort are older with material balances remaining

Unsurprisingly, given most mortgages have at least twenty-year terms, borrowers with loans maturing this year have a comparatively mature age profile. Within the total, we can identify a small but important minority who have large remaining balances but are at or approaching state retirement age. Almost half of borrowers with loans maturing this year are over 65 and have more than £100,000 remaining on their mortgage (Chart 3).  Again, we expect the vast majority of these will repay on schedule. However, for those that do not, it is a further positive sign that, for those we can fully profile, over half have less than 50 per cent current LTV and, on average, over half a million pounds of equity.

Chart 3: interest-only mortgages maturing in 2020, outstanding balance by age of borrower

Source: UK Finance

Of course, the higher risks will lie outside this - amongst those with higher LTVs and/or lower absolute amounts of equity.  Understanding the risks and options within the interest-only back book allows mortgage lenders to segment their books and to prioritise and personalise their contact programmes accordingly.

The mortgage industry will continue its proactive approach to work with interest-only customers through 2020 and beyond to ensure they are aware of the need to repay and have the means to do so. The earlier customers talk to their lender the more options they will have. In the words of our consumer leaflet we, and the FCA, strongly encourage all interest-only customers to Act now and talk to your lender, to ensure this continues to be a success story, both for the industry and its customers.