Is your mortgage a ‘ticking time bomb?’ Millions of households warned about interest-only home loans
One in 10 people have no strategy in place to pay off the loan when their deal expires. They face having to sell their home or have it repossessed if funding is not available.
INTEREST-only mortgages are a “ticking time bomb” for hundreds of thousands of homeowners in the UK who may have no way of paying off the money they owe, experts have warned.
Borrowers on this type of loans are allowed to only pay the interest on their mortgage each month, meaning the real amount owed stays the same.
As these payments are typically lower than on other types of mortgages, it allows buyers to borrow more money from elsewhere to buy their dream home.
The Council of Mortgage Lenders (CML) now estimates that around 1.9 million borrowers - about 21 per cent of all homeowner mortgages - are just paying off the interest on their debts without making a dent in the capital.
It is believed that one in 10 households do not have an appropriate strategy to repay them once the loan expires.
It means they face having to sell their home or have it repossessed if funding is not available.
Despite the figures, the CML stressed that the number of people on interest-only mortgages continues to shrink.
"The interest-only loan book was 3.2 million in 2012, it has now fallen to 1.9 million. We have seen four years of fairly steady decline, at a rate of between 10 and 13 per cent a year," a spokesperson for UK finance, formerly known as the CML said.
“While there may be some individual borrowers who would reach mortgage maturity without a robust repayment plan, this was not the case for most - the progress made on interest-only has been encouraging,” he added.
But Adrian Anderson, mortgage broker at Anderson Harris, said the 1.9 million borrowers on interest-only home loans a "time-bomb".
In 2013 the FCA called on banks to contact all borrowers with interest-only mortgages ending before 2020 about how they plan to repay. But only around 30 per cent of borrowers responded, according to the charity Citizen Advice.
The charity previously warned borrowers could face a shock if their plans for repaying the capital leave them with a shortfall.
Gillian Guy, Chief Executive of Citizens Advice, said: “Buying a home should mean security for you and your family, but for many people on an interest only mortgage, this stability is at risk once the interest only term comes to an end.
Here's how you could switch to a cheaper home loan
- Check that your existing mortgage doesn’t have any exit fees if you choose to leave – check your paperwork, as some charges can cost hundreds of pounds.
- Some lenders charge new product fees, so make sure you can afford these charges before switching
- Compare mortgage products by using comparison websites such as MoneySuperMarket and uSwitch.com to find the cheapest deals
- Work out how much your mortgage repayments are going to be on the new deal by using a mortgage calculator
“While fewer people may be taking out these type of mortgages, it’s important to recognise that many have been on them for years and have no plan of how to pay it off, leaving them at risk of losing their home.
“Lenders should work with borrowers to help them make plans to repay their mortgage and to determine whether they need any extra support.
We pay for your stories! Do you have a story for The Sun Online Money team? Email us at money@the-sun.co.uk or call 0207 78 24516