UK Finance observed a further reduction in the size and risk profile of the interest-only mortgage book in 2022, as customers continued to repay their loans on or ahead of schedule

According to the latest annual report of UK Finance, the stock of outstanding interest-only mortgages fell by 8% in 2022, as compared to the end of 2021. The results continued an ongoing decline trend. However, the research notes that this rate diminishes each year and the shrinkage will further continue at a progressively slower rate.

Namely, there were 924,000 interest-only outstanding mortgages registered in 2022. It is a little more than one quarter of the 3.2 million seen in 2012, when the organisation first started collecting these data. The steady shrinkage is a result of the industry collaborative strategy to manage down the size and risk profile of the interest-only book.

Interest-only mortgages have been a permanent service in the UK mortgage market, becoming particularly popular in the 1980s and 1990s, as it offers flexibility in repayment options and do not require any principal repayment?in?the first several years.

However, over the years, it became obvious that unforeseen economic crises and other events often hinder the borrower’s capacity to repay the capital at the end of term. Therefore, the industry has continuously made efforts to communicate the risks of the given loan type and inform customers about alternatives.

Today, mortgage lenders and mortgage brokers reach out to their interest-only customers to discuss their repayment plans and make sure they are able to repay the outstanding debt in time. As a direct result of continuous and evolving dialogue, the interest-only book has shrunk rapidly along with the hypothetical risk of non-repayment.

Although the statistics show that last year’s shrinkage was significantly smaller than the rate seen in previous years, UK Finance attributes that to the reduction of the mortgage book. The firm notes that “having already shrunk by nearly three quarters in just ten years, the capacity to maintain this rate diminishes each year.”

While the inflow of 33,000 new interest-only loans last year, worth ￡12.2 billion, represented only 3% of total new lending, it was able to offset?the reduction from redemption activity, bringing a marginal ￡1 billion net increase in the value of the interest-only stock over 2022. It was possible since the average value of a new mortgage loan is significantly higher than that of the mostly much older existing interest-only book.

It also predicts that the future reduction rate, both in number and value, will largely depend on the maturity schedule of the remaining stock.

As for the inability?to repay mortgage loans, UK Finance data indicates that interest-only loans maturing last year followed the pattern similar to the past ten years, with the vast majority redeeming in full on, or shortly after, their scheduled end date.

Since the industry continues to offer a small minority who are unable to repay their mortgage timely sustainable ways to keep up with their financial obligations, the rate of mortgage loan delinquencies is not expected to rise substantially.

We have recently reported on?How AI Can Be Used in Mortgage Lending.