Interest Only Loans

[Gato]

Has anyone studied data on mortgage arrears to see if there is a correlation between interest only and arrears?

 

[jimboy]

I remember reading in the papers once than one lender found that interest only mortgages between 2004-2007 were 6 times more likely to end up in arrears than mortgage and interest mortgages. Not sure if that applied to all the banks or not. It would probably depend on the proportion of investment property versus pdh too. It would be interesting if someone had a source - surely someone should have worked it out by now, as part of some academic project if nothing else? I suppose the banks have learned to stop offering 100% interest only loans and consumers have learned to stop buying them.

 

[Brendan Burgess]

I thought that the answer might be in this post:

http://www.askaboutmoney.com/showthread.php?t=184675

Or in this post
http://www.askaboutmoney.com/showthread.php?t=161591

Maybe read the underlying papers to see.

You would need to disentangle interest only from Loan to Value and Loan to Income. I don't think that interest only itself is a determinant of arrears, but I could be wrong.

If someone gets an 80% LTV interest only loan at 3 times income, I suspect that they are less likely to be in arrears than someone who got a 100% LTV capital and interest loan at 5 times income.

But I think that interest only was associated with high LTVs and high LTIs.

I think that Bank of Scotland was the only lender to hand out full term interest only loans and their arrears are probably the worst, despite the fact that almost all their loans are trackers.

Brendan