The Financial Conduct Authority (FCA) has urged homeowners with interest-only mortgages to contact their lenders to discuss repayment options, following concerns that many people may lose their homes due to a lack of financial planning.
Research suggests that in the next 15 years there are three periods when a significant number of interest-only mortgages will mature, with newer borrowers at a greater risk of struggling financially.
What is an interest-only mortgage?
The most popular type of mortgage is a repayment mortgage. This requires the borrower to repay the money they’ve borrowed over a set period of time such as 25, 30 or 35 years. At the same time, the borrower also pays interest on their loan.
However, around a fifth of all outstanding residential mortgages in the UK are interest-only mortgages. These involve paying the interest on the loan each month and only paying the capital at the end of the mortgage term. An estimated 1.9 million borrowers are believed to currently have an interest-only deal.
When savings rates were strong, many of those with interest only mortgages chose to invest the money they would have spent paying off their home’s equity. However, thanks to a changing economy, many of these people will struggle to repay such a large lump sum.
Should interest-only mortgage holders be worried?
Some mortgage experts have described the number of people with interest-only mortgages as a “ticking time bomb”, with many people taking out interest-only mortgages at a time when higher loan-to-value ratios were more likely to be granted than they are today.
When the financial crisis happened in 2008, lenders were forced to tighten their criteria and be more cautious when choosing who to lend to. Prior to that, many lenders paid very little attention to the finances of those they were lending to. As a result, interest-only mortgages were often given to people who may not necessarily have the means to pay the capital back.
In fact, it’s believed that one in 10 borrowers has no plan in place to repay their capital when their loan term expires. Even those with a plan might not have enough money to fulfill their contract and this could see thousands of borrowers losing their homes and having nothing to show for the thousands of pounds worth of interest they’ve paid.
What should I do if I have an interest-only mortgage?
If you have an interest-only mortgage, it’s crucial that you know when your deal ends and how much money needs to be repaid. Getting in touch with your mortgage lender can be an ideal starting point to determine where you stand.
If you’re concerned that you won’t have the funds needed to repay your property’s capital in full, it’s wise to seek financial advice as soon as possible.
There are options available, such as:
- Downsize property
- Extend your mortgage term
- Remortgage to a lower rate and make overpayments
- Release equity
- Use other savings and investments
Whether you’d like to learn more about remortgaging your property or you need help calculating the best option for you, please get in touch with the team at TaylorMade.
