Homebuying: Millions of borrowers have no way to repay their mortgage


iStock_000001437287XSmallA new report from the Financial Conduct Authority (FCA), has laid bare the extent of the interest-only mortgage crisis facing millions of UK homeowners.

The FCA, who recently took over from the Financial Services Authority (FSA), has found around half of the 2.6 million interest-only mortgage holders in the UK have no way of repaying the debt at the end of their mortgage term.

The research which was conducted by GfK NOP and question over a 1,000 interest-only mortgage holders, found the average shortfall was £71,000.

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The rise of the interest-only mortgages

Around a third of all mortgages in the UK are arranged on an interest-only basis. As the name would suggest an interest-only mortgage requires the borrower to simply make interest payments each month. No capital is repaid from the debt, as is the case with the other alternative, a capital repayment mortgage, which guarantees to repay the loan at the end of the term.

Interest-only mortgages first became popular in the 1980’s and 1990’s, when most borrowers took out a savings plan, such as an Endowment, Personal Equity Plan (PEPs) or an Individual Savings Account (ISA) to build up capital, which would then be used to repay the mortgage.

During the last housing boom however, many people took on interest-only mortgages, without putting a repayment vehicle in place, as this was the only way they could afford to move house, following the rapid rise in prices and relatively high interest rates.

Following the research any borrower with an interest-only mortgage due to mature before 2020 will be contacted by their lender to discuss their options.

Paul Smee, Director General of the Council of Mortgage Lenders, said: “The aim is not to force customers to take actions they do not wish to, but to ensure they are aware of their mortgage repayment position, and have an opportunity to take steps that may prove useful to them in avoiding unforeseen payment shocks later.”

Last year the FSA announced tough new guidelines to prevent the problem getting worse and many lenders have now stopped offering interest-only loans, or significantly reduced their availability. However, those borrowers who already have an interest-only mortgage face a series of tough choices.

Ways of tackling an interest-only mortgage

There are a number of ways of addressing the problem of an interest-only mortgage.

Perhaps the simplest is to switch the loan onto a capital repayment basis, which will mean the debt is repaid over the remaining term. However, this push up the monthly mortgage payment, making it an unaffordable option for some, especially those with a relatively short period left on their mortgage.

Other people will have savings or investments they can use to repay the debt. If there is insufficient capital to repay all of the outstanding balance, then a proportion could be repaid and the balance moved onto a capital repayment basis.

All mortgage lenders will allow borrowers to switch their mortgage onto a capital repayment basis, even if you are in a deal with penalties; after all, it is in their interest to see the debt repaid.

Some borrowers, with enough equity in their home, might consider downsizing to a small property.

Whatever the position though all interest-only borrowers should either speak to their lender about the problem or seek independent financial advice, doing nothing really is not an option.

There are many ways to deal with the problem of an interest-only mortgage, these are covered in more detail in an article we wrote last year, click here to read the full article.

Do you have an interest-only mortgage? Are you worried?

Our mortgage adviser, Linda Wood, is here to help you.

If you would like advice on your options call one Linda today on 0115 933 8433, alternatively enquire online or email linda.wood@investmentsense.co.uk

Your property may be repossessed if you do not keep up repayments on your mortgage.

For providing mortgage advice we will charge an application fee of £299 and we may also be paid a fee from the lender, any fee paid by the lender will be disclosed to you. Alternatively we will charge an arrangement fee of 0.5% of the loan and refund to you any payment received by us from the lender.