Hundreds of thousands of homeowners could be at risk of losing their homes because of their reliance on ‘interest-only’ mortgages.
As reported by the BBC, nearly one in five mortgage-holders has an interest-only home loan, and the city regulator has urged these people to speak to their mortgage provider as soon as possible about their repayment options.
The warning comes from the Financial Conduct Authority (FCA) who said many interest-only borrowers could face a shortfall in terms of what they owed, while they also found borrowers were ignoring letters from lenders.
With an interest-only mortgage, you only pay the interest during the mortgage term and then repay the full amount you borrowed when it matures.
There have been a series of warnings about this type of home loan in recent years, fuelling fears that some of those left with a huge bill could end up being repossessed.
A reported 1.67 million homeowners in the UK pay their mortgage via this method and many could be at risk if they struggle to repay their balance at the end of their mortgage.
Jonathan Davidson, executive director of supervision at the FCA, said: “We are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.
“We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons. We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take.”
Back in 2013 the FCA revealed that about 1.3m homeowners with such mortgages may not have enough money to pay off their home loan when it is due for repayment and face an average shortfall of more than £71,000.
The FCA is now particularly concerned by those borrowers who are ignoring letters from their lenders. Some believe that they have an adequate repayment plan in place, while others have little trust in their lender, so are suspicious of the letters.
They have urged these borrowers to talk to their lender as early as possible, otherwise they would restrict their options over time of paying off their mortgage.
• Establish your situation and consider whether you will have the money to pay off your mortgage.
• Start saving now to plug the gap.
• If your lender allows, you could extend the term of your loan to give you more time to build up funds to pay off the debt.
• If you are on a relatively high rate mortgage, check if you can remortgage, as rates remain quite low. You may not pay that much more on a repayment than on an interest.
• If your after-tax rate on savings is lower than your mortgage rate, you may want to repay your mortgage with savings; but check for penalties for overpaying first.
• You could try to go part interest-only, part repayment, so you’re chipping away at more of the debt.
• If you’re at risk of losing your home now, two Government schemes could help: Support for Mortgage Interest, and, if you’re facing repossession, the Mortgage Rescue scheme.
• If you plan to sell, make sure you properly consider where you would live and whether downsizing your home is the best option.
• If you need help switching mortgage, try an independent mortgage broker.