The Interest-Only ‘Timebomb’

 

free mortgage adviceIs ‘timebomb’ an appropriate phrase to use?

Yes, I believe it is. With some people having absolutely no repayment strategy in place – others with a strategy that is nowhere near enough on track to meet the outstanding balance, we are going to see a great many people either having to sell, downsize or, if they have time on their side, switch to Repayment (Capital & Interest) mortgages. Tighter affordability criteria as a result of the Mortgage Market Review now means that certain groups are finding it much more tricky, such as older borrowers/borrowers on limited incomes, the self-employed, etc, to switch to a Repayment mortgage.

Sadly, many people are burying their heads in the sand, deigning to worry about it ‘nearer the time’…the time, unfortunately for many, is fast approaching. The company Saga estimates that over 1.5m over-50’s with interest-only mortgages intend to pay them off with an endowment policy. Some research estimates that many people will be left with with an average shortfall of £35-71,000 (depending on which survey you read) to pay. Citizens Advice research estimates that there are 1.7m interest-only mortgage holders without any repayment vehicle in place

When is the time-bomb likely to explode?

The Council of Mortgage Lenders (CML) came up with some pretty startling figures:

  • in 2016, 74,700 interest-only loans will reach the end of their term
  • between 2017 and 2021, another 425,000 interest only mortgages will end
  • by 2032, the number will reach 189,800 a year.

What are Interest-Only mortgages?

Mortgages that are designed to pay only the interest (not the capital), normally a repayment ‘vehicle’ is in place to pay off the outstanding capital at the end of the agreed mortgage period. These were very popular during the 80’s and early 90’s, especially endowment policies. Repayment vehicle could be an ISA, an Endowment, a Pension, etc. But, even with one of these vehicles in place, they may not be able to provide enough to clear the outstanding balance. Endowments, especially, over a good number of years, have been maturing with less (a good deal less in some cases) to clear the mortgage. Big problem for a great many borrowers.

They could face repossession

Around 1.7m people in the UK have no strategy for repaying their interest-only mortgage, according to a report from Citizens Advice. Citizens Advice said that “time is running out” for some homeowners, who would either have to sell their home or find the money from somewhere to pay off the debt, or, a great fear for many, risk having the property repossessed.

What options are available

Some options to consider:

Switching to a Repayment (Capital & Interest) mortgage: A number of factors will affect this: free mortgage adviceaffordability, credit history, how much unsecured debt you have, age (this limits a great many people) and, of course, the monthly repayments will increase quite dramatically.

Switch part of the mortgage to Repayment, keeping the balance on interest-only. This will keep the monthly repayments lower than having 100% Repayment – and may be enough to repay any expected shortfall in a repayment vehicle. You may be expecting a lump sum in the future (ISA/Pension) to clear the outstanding capital at end of mortgage term.

Equity Release (ER): This allows you to release equity from your property, with which to repay an outstanding balance. Some ER plans allow monthly repayments but many don’t require monthly payments. You need to take advice on this from a highly qualified Equity Release specialist – the one we forward Equity Release enquiries on to is: Responsible Equity Release:

https://www.responsible.org.uk/starmortgages/

Downsizing: Sell the property, clear any outstanding balance then buy another property with the remaining capital. Obviously relies on you having enough equity in your property to all you to do this.

A call to action

The aim of this article is to encourage any who read it, and who currently have an interest-only mortgage, whether they have a repayment vehicle in place or not, to take some action. If they don’t free mortgage advicehave a repayment vehicle in place – look at their options. If they do have some form of repayment strategy in place – review it/them – to ensure that it is on track to produce the amount they’ll require – at the time they’ll require it.

It really is a ticking time-bomb and a great source of worry to a great many people. For some, it is still possible to get a strategy in place, for others, they are greatly limited but should, at the very least, take some action and get some advice. Try to get contingency plans in place.

For more information on this topic or on any aspect of home-buying/mortgages – please contact Star Mortgages:

info@starmortgages.co.uk of call free on: 0800 644-4223

 

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