UK financial regulators have expressed concerns about the increasing number of homeowners who are in danger of losing their homes, if they don’t act towards paying their debts. Although the Financial Conduct Authority (FCA) have tried to reduce the number of interest-only mortgages, there are still around 1.7m people in the UK who have them.
Interest-only mortgages involve repaying the interest on the borrowing only, with the debt itself remaining outstanding at the end of the term. During the application process, borrowers must outline how they plan to pay off the debt at the end of the term. Many borrowers indicate that they plan to sell the property, with others choosing to over-pay their monthly bills to breakdown the underlying debt so that payment at the end of the term might be easier.
Advocates for interest-only mortgages within the financial industry argue that the loans offer customers flexibility; especially for landlords and those who’s circumstances are likely to change long term. However, the FCA has consistently warned interest-only customers to have a plan and respond to their banks requests to confirm how they plan to pay back the debt.
Significant progress has been made to reduce the number of interest-only mortgages since 2013. Despite this, there are still many people who are unable to repay their debts by the end of their mortgage term and could possibly lose their homes. Many interest-only customers don’t want to contact their lender, when the FCA has strongly advised them to do so as early as possible. By opening a dialogue with their lenders, borrowers can find out what options they have for repayment so that they can plan their next course of action.
In 2013, the FCA highlighted three residential interest-only mortgage maturity peaks – the first of which is happening now. The losses of this peak are set to be somewhat low as this set of customers are likely to be reaching retirement with reasonable incomes, assets and levels of equity on their property.
In contrast, the following two peaks in 2027-2028 and 2032 include less affluent individuals who borrowed against their incomes when originally applying for the loan, greater rates of mortgages converted from repayment to interest-only and lower levels of equity property. Essentially, the issue of interest-only mortgages is set to get worse over the coming decade.
Currently, there are 1.67m full interest-only and part capital repayment mortgage accounts outstanding in the UK. Overall, this makes up 17.6% of all outstanding mortgage accounts. Borrowers should regularly check their repayment strategy to assess if it still works for them and that it is on track to be repaid at the end of the term. If this isn’t the case, a new strategy needs to be worked out with the lender.