Tuesday 22 September 2015 1:02 pm

Interest-only loans are going out of fashion, as number of current loans drop 16 per cent

Repeated warnings that interest-only mortgages are a "ticking time bomb" appear to be filtering through to the market, with figures out this morning showing a 16 per cent drop in the number of such loans outstanding.

A quarter of the reduction is the result of loans reaching maturity and being redeemed while a further 40 per cent is down to proactive borrowers paying back their loan before it matures, the Council of Mortgage Lenders (CML) said. Just one per cent of first-time buyers took out an interest-only loan in the past year.

Mortgage lenders had maintained their efforts to ensure borrowers had repayment plans in place, and some have scrapped interest-only options amid concerns around the form of lending. The former FCA chief executive Martin Wheatley warned back in 2012 that interest-only loans could be a “ticking time bomb”, with other industry experts continuing the clarion call.

In the two years following Wheatley’s warning there has been a 25 per cent reduction in the interest-only back book, the CML said.

Director general Paul Smee added: “The continued decline in interest-only mortgages outstanding confirms our perception that many borrowers are firmly on top of this issue. As an industry we clearly still have work to do to trigger more borrowers to respond to their lenders' attempts to understand their intentions and help them plan ahead for the maturity of their loans.”

However Mark Harris, chief executive of mortgage broker SPF Private Clients, noted that there was at least one area where interest-only mortgages were not going out of fashion.

"There has recently been a softening in the high-net-worth space, with NatWest offering wealthier customers interest-only mortgages from this week, the first time it has done so since December 2012," he said. "There is clearly demand for interest only from HNW borrowers so we expect other lenders to follow suit, giving customers more choice and flexibility in how they repay their mortgage."