‘Time-bomb’ or ‘So far so good’?
Whichever, independent guidance and support must be available.
In May the mortgage industry announced* that 1.9m interest-only mortgages were outstanding at end 2016. This was a fifth of all mortgages and a big reduction on 2012 when the number was 3.2m, “equivalent to a third of total residential mortgage stock”.
This week Mail Online used** the same industry research and statement to highlight a frightening situation for many families.
The main feature of these loans is that borrowers pay off the interest but not the capital. Until recently this was attractive both to many borrowers, because monthly payments are lower than with a ‘repayment’ mortgage, and to lenders, because they increase the number of customers who qualify for a loan.
There is a snag however.
Many borrowers have no plan in place to pay off the loan when their mortgage ends. So, as the website shows, there is a real risk people will have to sell their homes to raise the necessary money.
The lenders acknowledge the problem. They’ve been asking their most at-risk customers if they have repayment plans in place and report that 4 out of 5 have such plans. Pointing to the reduction in interest-only mortgages and those with a high loan to value, they summarise the their efforts to ensure positive outcomes as “so far so good”.
But Mail Online sees the problem as a “time bomb” threatening disaster for families unable to repay their loans.
Later this year the Financial Conduct Authority will publish a review of interest-only mortgages. It’s essential that the FCA and the lenders take full account of the Citizens Advice response based on the reasonable expectations of homebuyers.
Gillian Guy, Chief Executive, 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. It’s vital that people have access to independent guidance, advice and support to help them manage their finances.”
* Interest-only: coaxing the cat out of the bag, Council for Mortgage Lenders, 15/05/17
** Time-bomb alert for 1.9m on interest-only home loans, Mail Online, 23/07/17