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Interest Only Mortgages: Future Ramifications for the UK market
Market Briefing, November 2006, 1356  €


Description

IntroductionInterest-only mortgages are currently a great source of industry and media attention.
Indeed, interest-only mortgages have become increasingly popular, yet they pose a number of risks to both customers and lenders.
What can lenders and intermediaries do to reduce the possibility of problems emerging in the future?Scope*Provides data on the extent to which interest-only loans account for in the mortgage market and forecasts their proportion up to 2010.*Discusses the benefits and risks of interest-only mortgages for both customers and lenders.*Provides insight into how lenders can reduce their exposure to potential future problems.*Incorporates primary interviews from industry experts and secondary data from a wide range of sources.HighlightsOver the last few years, interest-only mortgages have continued to increase in popularity.
Indeed, in Q1 2005 interest-only mortgages accounted for 14.9 per cent of all new mortgages taken out during the quarter; by the end of Q2 2006 they accounted for 25.1 per cent.Complaints on interest-only mortgages are increasing, but they are still on a very small scale.
The Financial Ombudsman Service (FOS) has stated that it receives around 300 complaints on interest-only mortgages a year.Lenders and intermediaries can and should do more to tackle current problems with interest-only mortgages.
These steps include contacting customers on a yearly basis, making sure the customer understands the risks and the need to set up a repayment vehicle, and examining their mortgage selling processes, among others.Reasons to Purchase*Plan your strategy with confidence using Datamonitor's forecasts of the proportion of interest-only mortgages as a repayment vehicle up to 2010.*Evaluate the risk of interest-only mortgages and understand what steps your business can take to reduce its exposure.*Identify current best practice in the industry, and what other steps lenders are likely to take.

Sommaire
 
DATAMONITOR VIEW 1
CATALYST 1
SUMMARY 1
METHODOLOGY 1
ANALYSIS 2
Interest-only mortgages have become increasingly popular 2
Interest-only mortgages explained 2
Interest-only mortgages now account for a significant proportion of mortgages in the UK 4
Their popularity is not surprising given that interest-only mortgages provide a number of opportunities for borrowers 4
But there are a number of significant risks attached to interest-only mortgages 5
Interest-only mortgages pose a number of important risks for borrowers 5
Moreover, there are an increasing number of interest-only mortgages whereby the lender is not aware of how the borrower will repay the capital at the end of the mortgage term 6
As a result, lenders are not able to judge the scale of the potential problem 7
In fact, Datamonitor forecasts that the proportion of interest-only mortgages without a repayment vehicle in place will increase over the next years 8
It appears there could be trouble ahead for lenders and intermediaries 9
Complaints have started to trickle in at the FOS 9
Moreover, the FSA has now become involved 9
It is believed that the FSA will highlight deficiencies rather than actively change current practices 10
However, at the end of the day, should customers be unable to pay their mortgage, lenders will then repossess the property 10
Yet is a mis-selling crisis in store? 10
The majority of the mortgage industry does not foresee a mis-selling crisis 11
Moreover, lenders and advisers argue that the responsibility for any shortfall in mortgage payments is down to the customer, not them 12
Lenders and advisers must therefore take more steps to reduce potential future problems 12
Lenders are beginning to take a number of steps 13
But more should be done 13
In fact, all of the above measures fall under the FSA's TCF initiative 14
APPENDIX 15
Supplementary data 15
Definitions 17
Endowment mortgage 17
Interest-only mortgage 18
Further reading 18
European mortgage reports 18
UK mortgage reports 18
UK mortgage briefings 19
Forthcoming mortgage briefings 19
UK Mortgage Market Map 2006 20
Key Features 21
For further information 22
Relevant links 22
Datamonitor's custom research capabilities 23
Ask the analyst 24
List of Tables
Table 1: Datamonitor's forecasts of the proportion of loans for house purchase by repayment type, 2006-2010 9
Table 2: Number of new mortgages by repayment method, Q1 2002-Q2 2006 15
Table 3: Proportion of new mortgages by repayment method, Q1 2002-Q2 2006 16
Table 4: Proportion of interest-only mortgages with and without a specified repayment vehicle of total new mortgage loans and new interest-only mortgages, Q1 2002-Q2 2006 17
List of Figures
Figure 1: With an interest-only mortgage, monthly payments can be hundreds of pounds cheaper, October 2006 3
Figure 2: The last few quarters have seen a particularly significant rise in the take-up of interest-only mortgages, Q1 2002-Q2 2006 4
Figure 3: Interest-only mortgages with no specified repayment vehicle have seen a significant rise in popularity over the last five years, Q1 2002-Q2 2006 7
Figure 4: In Datamonitor's opinion, interest-only mortgages without a specified repayment vehicle will continue to become more popular, 2006-2010 8
Figure 5: The UK Mortgage Market Map 2006 covers a wide range of mortgage sectors 20
Figure 6: Taxonomy of UK Mortgage Market Map 2006 21
Figure 7: Datamonitor's core consulting capabilities 24
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