Interest-only mortgages were popular during the housing booms of the early nineties and ‘noughties’. Typically, borrowers make monthly repayments that cover only the interest on the amount borrowed. The capital (the full amount borrowed) is then paid back when the mortgage term matures – typically after 25 years – using funds such as savings or inheritance, usually with the hope that the property will have increased in value.
However, a recent report by the Financial Conduct Authority (FCA) warned that some borrowers with interest-only mortgages that are due to mature within the next seven years may be unable to fully repay their loan.
Key figures from the FCA report:
- 600,000 borrowers will see their mortgages mature before 2020
- Around 90 per cent will have a repayment strategy in place
- Just under half are likely to have a shortfall
- A third are expected to see a shortfall of over £50,000
- Around 2.6 million interest-only mortgages will mature within the next 30 years, leaving over a quarter of a million unable to repay their loan.
Whilst some are prepared for the shortfall, the FCA believes the number affected and the amount owed will be much higher than many anticipate. Of those surveyed, a shortfall would most likely be paid through savings (21 per cent), by downsizing their home (19 per cent) or by re-mortgaging (15 per cent).
The FCA will now ensure lenders first contact all borrowers who are due to repay their mortgages in the next seven years, prompting them to re-check their repayment plans and to consider the options available to them.
Martin Wheatley, chief executive of the FCA, said: “My advice to borrowers is to not bury your head in the sand – take action now. Understand the terms of your mortgage agreement and take control; work out if you can repay the outstanding amount when your mortgage matures. But you must engage with your lender to discuss how you propose to repay the outstanding loan.”
Please contact Peter Taaffe for advice on mortgage repayments and for help to set up repayment strategies.