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Interest-only mortgage holders still owe £28m

ALMOST 200 customers who took out interest-only mortgages at Clydesdale Bank still owe a total of £28 million even though their loans have matured, a filing with Companies House has revealed.

REPORT: Clydesdale Bank head, Glasgow-based David Thorburn.
REPORT: Clydesdale Bank head, Glasgow-based David Thorburn.

The ability of customers to repay interest-only home loans has become a major concern of financial regulators as an estimated 260,000 home owners with no repayment strategy come to the end of their deals.

Glasgow-based Clydesdale Bank, headed by David Thorburn, said in its interim financial report for the year to the end of March showed that at that date it had 194 customers who were six months past the maturity date on their interest-only mortgages.

This was 17 more, or a 10% rise, on the 177 it was dealing with at the same time last year. These 194 borrowers have outstanding mortgages with Clydesdale totalling £28m, up 47.4% on the £19m 12 months earlier, and coming in at an average of £144,329. Those detailed were only the most complex cases, with most cases resolved within six months.

A Clydesdale spokesman pointed out it had a mortgage book of £17.1 billion. Reasons suggested for interest-only mortgages not being met on maturity included funds from other investments, such as endowments or a property being sold, not yet being available.

The spokesman confirmed the £28m was not classed as bad debt and added: "We have a strong track record of mortgage lending and working with customers to repay their loans when difficulties arrive."

The spokesman said the bank was working with the 194 customers to find the best way forward to meet the loan repayments and each case was being dealt with on an individual basis.

Clydesdale did not reveal the geographic make-up of the affected borrowers but given the focus of its business in Scotland and the north of England it is likely that a high proportion are north of the Border.

The bank, which owns Yorkshire Bank, revealed that in the six months to the end of March it had repossessed 82 homes, of which 28 were voluntary. In the accounts Clydesdale said it pursued repossession and resale of assets only once "all other avenues" have been explored. It pointed out it aimed to bring cases to a formal conclusion six months after the loan has reached maturity but conceded complex cases may take longer.

The accounts, for Clydesdale Bank plc, also showed an £87m pre-tax profit, against £29m in the comparable period. New rules on mortgage selling are likely to see few new interest-only loans issued. Regulators remain concerned about the 2.6 million of those mortgages due for repayment over the next 30 years. At their peak in 2008, interest-only deals made up 43% of all new advances.

A study by the Financial Conduct Authority conducted a year ago found about 90% of interest-only borrowers whose loan is due to be repaid before 2020 have a repayment strategy such as an endowment policy. But just under half of all borrowers are likely to face a shortfall with one-third having to find more than £50,000.

The next peak in interest-only mortgages coming due will be in 2017/2018 as a result of the number of endowment mortgages sold in the 1990s and early 2000s.

Further peaks will come in 2027/28 and in 2032 as those who took out loans during the inflating of the credit bubble come to repay.

The FCA is concerned some of these are held by homeowners who could be in low or negative equity. Some struggling borrowers have switched onto cheaper interest-only deals to avoid having their homes repossessed. Earlier this month the Council of Mortgage Lenders (CML), which represents major banks, reported the number of interest-only mortgages outstanding dropped by 12% between 2012 and the end of 2013, falling by 300,000 to 2.2 million.

Similarly, the number of "part and part" mortgages, with an interest-only element, has dropped by 13 per cent to 620,000. Analysing forbearance by lenders, The Bank of England warned in its Financial Stability Report last June: "The switching of mortgages onto an interest-only basis may make them affordable and appear to be performing. But borrowers may default when interest rates rise or when capital repayments have to be made."

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