Nearly a million interest-only mortgage borrowers at risk of repossession
Fresh warning from Citizens Advice that huge number don’t have a strategy to repay their home loans.
Almost a million interest-only mortgage borrowers could see their homes repossessed because they have no strategy in place to repay their debt, Citizens Advice has warned.
With this type of deal borrowers only pay off the interest on their home loan each month instead of a mix of capital and interest. As a result, the original amount borrowed has to be paid back in one big lump sum at the end of the term.
Citizens Advice estimates 934,000 interest-only borrowers do not have a plan in place to pay back what they owe when their mortgage matures - much higher than previously thought.
The charity warned that "time is running out" for these people, as those without a strategy will either have to sell their homes, find some capital to pay off the debt, or face having their homes taken away.
Mortgage time bomb
This is the latest in a series of warnings about interest-only mortgages that have surfaced over the last few years.
In 2013 the FCA revealed its findings from an investigation into interest-only mortgages and estimated that up to 2.6 million would mature by 2041, but around 10% of those borrowers did not have a strategy to repay what they owed.
The FCA has said that it expects there to be waves of potential repossessions in 2017-18, 2027-28 and 2032 based on previous peaks in the sale of interest-only deals.
However, research from Citizens Advice suggests the watchdog may have underestimated the problem over this timescale.
The charity says that there could actually be 3.3 million interest-only mortgage borrowers in the UK, including 1.7 million with no linked repayment vehicle like an endowment or ISA and 934,000 with no strategy at all for repayment.
Interest-only mortgages were particularly popular before the credit crunch as they offer cheaper monthly repayments, which made it easier for many borrowers to get onto the property ladder. But they were approved without much probing into how borrowers were planning to repay their debt.
The rules were tightened in 2012 to ensure interest-only mortgages were no longer available without a repayment plan, which has led to a large drop in the number of interest-only mortgages sold. However, homeowners who already have an interest-only mortgage are still at risk.
Need to remortgage? Compare the best deals with loveMONEY
Lenders need to do more
Citizens Advice said it was concerned that interest-only mortgage borrowers don’t have the same protections when their term ends compared to repayment mortgage borrowers that fall into arrears.
Lenders now have a legal obligation to consider alternative options before starting repossession action, including extending the length of the mortgage, changing the type of the mortgage and giving people reasonable time to sell their property.
But these safeguards don’t apply to interest-only borrowers when they come to the end of their term, which is the point when many borrowers discover they are in trouble.
Back in 2013, following its review, the FCA called on banks to contact borrowers with interest-only mortgages ending before 2020 to ask about how they plan to repay, but only 30% responded.
Citizens Advice says lenders need to do more to help interest-only borrowers prepare for the end of their mortgages and urged firms to phone customers or offer a face-to-face meeting.
The charity also recommended that lenders should have to follow the same steps already in place for repayment mortgages before taking an interest-only borrower to court, including:
- A requirement to discuss a range of repayment options.
- A requirement to discuss moving to an alternative mortgage product, including extending the duration of the mortgage.
- Enough time to sell their home for market price if necessary.
Gillian Guy, chief executive of Citizens Advice, said: “People buy a home for stability – but interest-only mortgages have forced many into a financial black hole. Lenders have to exhaust all other options when borrowers get into arrears – it’s time to level the playing field so that interest-only customers get the same protections when their mortgages mature. It is also important that people can get independent advice, guidance and support about how they can plan and manage their finances."
If you have concerns about your interest-only mortgage take a look at: Your options if you're struggling to pay off your interest-only mortgage.
Need to remortgage? Compare the best deals with loveMONEY
More on mortgages and home:
Comments
Be the first to comment
Do you want to comment on this article? You need to be signed in for this feature