Interest-only mortgages were a popular way to buy property especially in the property boom of the nineties and early noughties.
600,000 interest-only mortgages are due to expire by 2020.
In recent years the FCA, Financial Conduct Authority, have been warning about a significant number of households who will be in danger of losing their homes. As interest-only mortgages come to term, homeowners could find themselves unable to repay what they owe at the end of the loan.
They have said as many as 300,000 of those in this first group may not have any solution in place to be able to afford to pay off the loan.
Interest-only mortgages are ‘a ticking time bomb.’
The estimated that the 600,000 interest-only mortgages due to expire by 2020 are just the first wave. The FCA says there are two maturity peaks expected after that, in 2027-28 and 2032.
Borrowers have been urged not to wait but to act now to secure a solution to the problem.
The FCA said the earlier homeowners talk to their lenders, the better and has issued guidelines for those with the mortgages.
They said that many homeowners in the first wave will have a mortgage-linked endowment policy in place. A policy to help them pay off their loan. They will be concentrated in the south of England.
Borrowers more at risk of defaulting on their loans are more likely to be found in the second two peaks.
The next tranche of interest-only mortgages will reach a maturity peak around 2027/28. This as a result of deals sold in the early to late Noughties, during the boom years of strong house price growth.
Borrowers in this wave will be less well-off and will have reached middle age. This group will also contain higher numbers of people who have had to convert from a repayment mortgage to an interest-only deal. Perhaps due to financial difficulties.
Interest-only mortgages in this wave will be concentrated in the South West, the East, the North West, London and the West Midlands.
The final and most at risk group of interest-only mortgages will mature around 2032. It will include a large proportion of borrowers who had to stretch their finances to take out a mortgage. Often using little in the way of a deposit.
Was irresponsible lending to blame for some of these mortgages?
Some Banks such as Northern Rock infamously offered a 120% loan to value interest-only deal. So convinced were they that the property market would continue to rise. Borrowers could take out a loan for more than the house’s value. The idea was you could use the extra capital for moving and furnishing costs.
Lower-deposit deals were taken out in the mid and late Noughties. And there are high concentrations of heavily-indebted people with low or negative equity in this group.
Interest-only loans allowed borrowers to pay off the interest rather than the loan itself. Helping them to maximise their borrowing capacity. The loan is then repaid either in lump sums during the term or on the sale of the property.
People should talk to their mortgage providers sooner rather than later.
Consumers groups have come on board to try and help people with interest-only mortgages. They say some people are not talking to their mortgage providers to search for a resolution.
David Blake of Which? Mortgage Advisers said: –
“The benefit of an interest-only mortgage is that the monthly payments will be significantly lower than a repayment mortgage.”
“However, interest-only mortgages are less popular than they used to be. Despite the benefits, they can cause financial uncertainty towards the end of the term.”
So, what can the troubled homeowners who are only paying interest do to avoid losing their homes?
People who have interest-only mortgages from before April 2014 may have difficulties switching. As since then, lenders have had to put borrowers’ repayment plans under greater scrutiny with a full affordability assessment.
“If you can’t repay the loan in full, you may need to look into remortgaging your property,” says Blake. “If you stay with the same lender, they can often switch you to a repayment mortgage or extend the term of your existing arrangement. Though you may move to a higher interest rate.”
With interest-only mortgages, the borrower makes no capital repayments on the loan, just interest. Some borrowers will have an investment plan in place to pay off the debt. But some of these plans have been underperforming, while some borrowers never even set them up.
Martyn James of the complaints website Resolver said
“The majority of policies are likely to have been sold with mortgage endowments, so there should have been a way of repaying the loan, even if it was underperforming.”
“However, the FCA’s nervousness comes from the fact that some people took endowment compensation and failed to realise they needed to pay off the mortgage with it. Then there are the people who knew they had interest-only policies. But were relying on an inheritance or other windfalls to cover the final bill. This isn’t as rare as you might think, given that the heyday of interest-only policies was in the crazy lending days before the financial collapse.”
The first step should be to review your plans, say consumer group.
Which? went on to say that the first step should be to review your plans. Acting earlier say the FCA will give borrowers a better chance to either switch to a repayment mortgage, part-capital repayment mortgage, extend the term or make additional payments. Later on, these options may fade and the prospect of selling the home could become more likely.
The governments Money Advice Service issued guidance saying,
“When granting new loans, lenders must assess whether you can afford to make the necessary payments,”
“This includes cases where you want to remortgage to another lender – your new lender will need to satisfy itself that you can afford the loan.
“Your existing lender is allowed to offer you a new deal (ie switch to another interest rate) as long as it does not involve increasing the amount you borrow (other than any fees for switching).”
Effects on an average mortgage if the loan terms were changed.
The FCA illustrated the effects on an average mortgage if the loan terms were changed. In the case of a £125,000 interest-only mortgage taken out over 25 years at a rate of 3%, the repayments would be £313 per month. With £125,000 due at the end of the term. The total cost would be £218,750.
If someone chooses to switch to a repayment deal after 10 years, the monthly repayments rise to £864 per month for the last 15 years, with total cost £192,881.
In the case of a borrower switching with 10 years left, their monthly repayment will be £1,208 per month and the final cost is £201,092.
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