Interest Only Mortgages: Future Ramifications for the UK market

Table of Contents

• CATALYST
• SUMMARY
• METHODOLOGY
• ANALYSIS
  • Interest-only mortgages have become increasingly popular
    • Interest-only mortgages explained
    • Interest-only mortgages now account for a significant proportion of mortgages in the UK
    • Their popularity is not surprising given that interest-only mortgages provide a number of opportunities for borrowers
  • But there are a number of significant risks attached to interest-only mortgages
    • Interest-only mortgages pose a number of important risks for borrowers
    • 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
    • As a result, lenders are not able to judge the scale of the potential problem
    • In fact, Datamonitor forecasts that the proportion of interest-only mortgages without a repayment vehicle in place will increase over the next years
  • It appears there could be trouble ahead for lenders and intermediaries
    • Complaints have started to trickle in at the FOS
    • Moreover, the FSA has now become involved
      • It is believed that the FSA will highlight deficiencies rather than actively change current practices
    • However, at the end of the day, should customers be unable to pay their mortgage, lenders will then repossess the property
    • Yet is a mis-selling crisis in store?
      • The majority of the mortgage industry does not foresee a mis-selling crisis
      • Moreover, lenders and advisers argue that the responsibility for any shortfall in mortgage payments is down to the customer, not them
  • Lenders and advisers must therefore take more steps to reduce potential future problems
    • Lenders are beginning to take a number of steps
    • But more should be done
      • In fact, all of the above measures fall under the FSA' s TCF initiative
• APPENDIX
  • Supplementary data
  • Definitions
    • Endowment mortgage
    • Interest-only mortgage
  • Further reading
    • European mortgage reports
    • UK mortgage reports
    • UK mortgage briefings
    • Forthcoming mortgage briefings
    • UK Mortgage Market Map 2006
      • Key Features
      • For further information
  • Relevant links
  • Datamonitor' s custom research capabilities
  • Ask the analyst
  • List of Tables
    • Table 1: Datamonitor' s forecasts of the proportion of loans for house purchase by repayment type, 2006-2010
    • Table 2: Number of new mortgages by repayment method, Q1 2002-Q2 2006
    • Table 3: Proportion of new mortgages by repayment method, Q1 2002-Q2 2006
    • 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
  • List of Figures
    • Figure 1: With an interest-only mortgage, monthly payments can be hundreds of pounds cheaper, October 2006
    • Figure 2: The last few quarters have seen a particularly significant rise in the take-up of interest-only mortgages, Q1 2002-Q2 2006
    • 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
    • Figure 4: In Datamonitor' s opinion, interest-only mortgages without a specified repayment vehicle will continue to become more popular, 2006-2010
    • Figure 5: The UK Mortgage Market Map 2006 covers a wide range of mortgage sectors
    • Figure 6: Taxonomy of UK Mortgage Market Map 2006
    • Figure 7: Datamonitor' s core consulting capabilities