MORTGAGE TIMEBOMB
Nearly 1m with interest-only deals can’t pay off lump sum ... and may face repossession
ALMOST one million homeowners with interest-only mortgages have made no arrangements for paying off their debt.
The ‘ ticking time bomb’ means nearly one in three with such loans could see their home repossessed at the end of the term.
With interest-only mortgages – taken out by millions in the 1980s and 1990s – monthly repayments are lower than with a traditional home loan because only the interest, rather than any capital, is paid off, but the full debt must be cleared at the end of a typical 25-year term.
Now a study suggests 3.3million homeowners have an interest-only mortgage – 500,000 more than previously thought – but 934,000 of these have no plan in place to pay it off when their term ends. Half have not even considered how to repay the capital.
Extending the length of the mortgage to gain more time to raise the money has become increasingly difficult since the introduction of stricter lending criteria last year, with many now deemed too old for a loan extension.
Citizens Advice, the charity that conducted the research, said some homeowners told it they were missold their loan and were not even aware they had to repay the full capital at the end of their term.
Others bought an endowment policy, a stockmarket-linked savings plan designed to pay off the loan in full but which, millions have discovered, is not enough to cover the debt.
Gillian Guy, of Citizens Advice, said:
‘A financial black hole’
‘Interest-only mortgages have forced many into a financial black hole.
‘Borrowers who took out interestonly mortgages years ago and don’t have a plan to repay face a ticking time bomb. The choice between selling their property, quickly finding the money to pay off their debt or risk of repossession is a distressing prospect.’
She added: ‘ Borrowers have a role to play in understanding what they sign up to, but there is more banks could do to help.’
The charity expressed concern that interest-only mortgage holders do not have the same protection at the end of their term as those with other home loans who fall into arrears. Three years ago, lenders were told they had to consider alternative options before repossessing homes, including extending the length of a mortgage, changing the type of mortgage and giving people reasonable time to sell their property if necessary.
But these protections do not apply to interest-only mortgage holders at the end of the term – the point when many discover they are in trouble.
Mrs Guy said: ‘It’s time to level the playing field so that interest-only customers get the same protections when their mortgages mature.’
Figures show 85,000 interestonly mortgages are expiring every year, almost half among over-65s. The crisis is expected to reach a peak in the next two years, with industry bodies predicting a rise in repossessions.
The Financial Conduct Authority has said that, following previous peaks in the sale of interest- only mortgages, it expects waves of potential repossessions between 2017 and 2018, 2027 and 2028 and in 2032.
Two years ago, the FCA called on banks to contact all borrowers with interest- only mortgages ending before 2020 about how they plan to repay.
But Age UK believes over-55s could come under pressure to cash in their pensions to pay off the debt, after the introduction of new freedoms to do so in April. The charity said in a recent report that people must not be put under pressure to cash in their pensions to ‘settle outstanding mortgage debt if they have other options, such as extending the mortgage’.
Caroline Abrahams, of Age UK, said: ‘The large numbers of older people with interest-only mortgages is a real concern.
‘While some may be able to extend their mortgage, this is not always possible for those who are retired, because even if they could afford it, many banks and building societies impose arbitrary age limits on mortgage lending. Age UK is calling for lenders to work with older mort- gage borrowers to find affordable and realistic solutions.’
Simon Bottery, at the charity Independent Age, said older people with interest-only mortgages ‘should be offered more support and advice’.
He added: ‘They may not have made enough preparations for the future and might now be faced with leaving a home they’ve lived in for many years.
‘We would urge anyone concerned about mortgage repayments to seek independent financial advice to ensure they have the right plans in place.’
The research by Citizens Advice is based on a YouGov poll of 2,000 homeowners.