UK Mortgages – High Share for Interest-Only Debt


New data from the UK offers a reminder of how different housing finance systems are nation to nation. Almost one in five home owners in the UK has an interest-only mortgage, with three maturity peaks. In contrast, only 0.2% of 2017 US home purchase and refinance originations were interest-only as reported by Frank Nothaft, Chief Economist at CoreLogic, a property data and analytics company. The US share of interest-only originations reached 9.6% in 2006.

The current 2018 UK peak is comprised of more affluent home owners with higher incomes, assets and more equity in their homes. The maturity of interest-only mortgages will also peak in 2027-28 and in 2032. Borrowers in the more distant maturity peaks are less affluent, have higher income multiples and lower expected equity in their homes. The 1.67 million interest-only loans represent 17.6% of all outstanding mortgage accounts in the UK.

The Financial Conduct Authority (FCA) is an independent public body that is funded by the 56,000 financial services firms and financial markets in the UK. The FCA is charged with making markets work well for individuals, businesses and the whole economy. In addition to protecting consumers and businesses, the FCA is charged with promoting competition.

On January 30, 2018, the FCA issued a press release intended to remind interest-only borrowers of their obligations and to be aware of the maturity schedules. The FCA reviewed 10 large lenders who comprise 60% of the interest-only market. The FCA cited good progress in reducing the number of interest-only mortgages, but also a concern that an increasing share of interest-only borrowers will not be able to pay off their mortgages at maturity, putting them at risk of losing their homes. The FCA emphasized the lagging communication between lenders and borrowers, urging that lenders take additional steps to advise their interest-only borrowers of options and strategies.

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