Is your mortgage a ‘ticking time bomb?’ Millions of households warned about interest-only home loans
One in 10 people have no strategy in place to pay off the loan when their deal expires. They face having to sell their home or have it repossessed if funding is not available.
INTEREST-only mortgages are a “ticking time bomb” for hundreds of thousands of homeowners in the UK who may have no way of paying off the money they owe, experts have warned.
Borrowers on this type of loans are allowed to only pay the interest on their mortgage each month, meaning the real amount owed stays the same.
As these payments are typically lower than on other types of mortgages, it allows buyers to borrow more money from elsewhere to buy their dream home.
The Council of Mortgage Lenders (CML) now estimates that around 1.9 million borrowers - about 21 per cent of all homeowner mortgages - are just paying off the interest on their debts without making a dent in the capital.
It is believed that one in 10 households do not have an appropriate strategy to repay them once the loan expires.
It means they face having to sell their home or have it repossessed if funding is not available.
Despite the figures, the CML stressed that the number of people on interest-only mortgages continues to shrink.
"The interest-only loan book was 3.2 million in 2012, it has now fallen to 1.9 million. We have seen four years of fairly steady decline, at a rate of between 10 and 13 per cent a year," a spokesperson for UK finance, formerly known as the CML said.
“While there may be some individual borrowers who would reach mortgage maturity without a robust repayment plan, this was not the case for most - the progress made on interest-only has been encouraging,” he added.
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But Adrian Anderson, mortgage broker at Anderson Harris, said the 1.9 million borrowers on interest-only home loans a "time-bomb".
He said: “We have definitely got an interest-only mortgage ticking time bomb scenario.”
“Lots of people in the past took out interest-only mortgage at much higher loan-to-value ratios than would now be granted, and people took them out without thinking about how they would pay them off.”
He added that borrowers without a repayment strategy should start thinking about how they can pay their mortgages and seek independent advice.
"Most lenders will allow a borrower to overpay on their mortgage by up to 10 per cent of the mortgage amount per annum so you could set up a direct debit to overpay every month if you can afford to do so," he said.
"Another option may be extending the term, giving you more time to pay back the mortgage. Speak to your lender to see whether this is possible if you feel you can still afford the monthly payments into retirement," he added.
The Financial Conduct Authority (FCA), UK’s financial watchdog, said that due to previous peaks in the sale of interest-only mortgages, they expect there to be waves of potential repossessions in 2017-2018, 2027-2028 and in 2032.
What should I do if I have an interest-only loan
Here are some tips from Citizen Advice Group and MoneySavingExpert
- Evaluate your situation: Start planning early and consider whether you will really have the money to pay off your mortagage. The sooner you start planning and dealing with it the better
- Think about extending your mortgage: Speak to your mortgage lender to see what options are available to you. You may be able to remortgage your property, or extend your mortgage period to give you time to raise the money to pay it back.
- Selling your home: Consider selling your home and move to cheaper property. If you are not confident of completing the sale in time, extending the mortgage period may be helpful.
- Shop around: Look into taking out another mortgage from a different lender. You can shop around for the best deal, or speak to a mortgage broker.
- Seek help: If you're at risk of losing your home, two Government schemes could help: Support for Mortgage Interest, and, if you're facing repossession, the Mortgage Rescue scheme. If you need general money or debt advice, try the (you can try 0300 5005000) or .
In 2013 the FCA called on banks to contact all borrowers with interest-only mortgages ending before 2020 about how they plan to repay. But only around 30 per cent of borrowers responded, according to the charity Citizen Advice.
The charity previously warned borrowers could face a shock if their plans for repaying the capital leave them with a shortfall.
Gillian Guy, Chief Executive of Citizens Advice, said: “Buying a home should mean security for you and your family, but for many people on an interest only mortgage, this stability is at risk once the interest only term comes to an end.
Here's how you could switch to a cheaper home loan
- Check that your existing mortgage doesn’t have any exit fees if you choose to leave – check your paperwork, as some charges can cost hundreds of pounds.
- Some lenders charge new product fees, so make sure you can afford these charges before switching
- Compare mortgage products by using comparison websites such as MoneySuperMarket and uSwitch.com to find the cheapest deals
- Work out how much your mortgage repayments are going to be on the new deal by using a mortgage calculator
“While fewer people may be taking out these type of mortgages, it’s important to recognise that many have been on them for years and have no plan of how to pay it off, leaving them at risk of losing their home.
“Lenders should work with borrowers to help them make plans to repay their mortgage and to determine whether they need any extra support.
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