Nearly 1m interest-only mortgage holders facing ruin

A concerning warning from Citizen’s Advice has indicated that nearly 1 million people could face financial ruin as they cannot pay off their interest-only mortgages.

Startling statistics from the charity suggests 934,000 people have interest-only mortgages, with no plan on how to pay them off when the term finishes. Already, time is ticking for some homeowners, who will be forced to sell their homes, find the capital to pay off the debt or risk having their property repossessed.

Unaware

Unbelievably, some of the people who came to the consumer said that they were not even made aware that the capital would need to be paid off at the conclusion of their term. The average shortfall is thought to be £71,000.

Citizen’s Advice says that there are 3.3m mortgage holders who have interest-only products in the UK. Through polling commissioned by YouGov, it is estimated that 1.7m of these have no linked repayment plan, such as an endowment or ISA. 934,000 have no plan for repayment, with 432,727 of these not even thinking about how they will eventually pay back the capital.

In 2012, rules were tightened in order to ensure that interest-only mortgages were no longer available without a sustainable repayment plan. This resulted in a substantial dip in the number of products sold. Despite this, Citizen’s Advice is calling for more support for those people already holding these types of mortgage.

Concern

The charity is concerned that these interest-only mortgage holders do not have the same type of protection when their term ends than when standard mortgage holders fall into arrears. Three years ago, a protocol was launched giving lenders are legal obligation to think about different options before starting possession procedures. This includes extending the timeframe of a mortgage, changing its type and allocating time for people to sell their homes if necessary.

However, these protections do not apply to interest-only mortgages at the conclusion of the term-when many consumers realise that they are in trouble. The Financial Conduct Authority (FCA) has stated that due to past peaks in the sale of interest-only mortgages, they fully expect there to be periods of repossessions between 2017=18, 2027-28 and in 2032.

Nearly 1m interest-only mortgage holders facing ruin

‘People buy a home for stability-but interest-only mortgages have forced many into a financial black hole,’ commented Gillian Guy, Chief Executive of Citizen’s Advice. ‘It is good rules around these mortgages have changed, but there are many people who previously took out these products and face losing their home.’[1]

‘Lenders have to exhaust all other options when borrowers get into arrears – it’s time to level the playing field so that interest-only customers get the same protections when their mortgages mature. It is also important that people can get independent advice, guidance and support about how they can plan and manage their finances, Guy added.[1]

Communication

The Council of Mortgage Lenders said, ‘lenders will continue to communicate directly with customers in a variety of ways and to raise consumer awareness. Borrowers should not ignore attempts to communicate with them. The lender is trying to help and reduce the risk of shocks at the end of the mortgage term.’[1]

A spokesman for the FCA added, ‘we expect firms dealing with interest-only borrowers to discuss repayment strategies and propose solutions where there are no plans in place. While we have seen many firms progress with this, borrowers must also engage with their lenders now to resolve it, we will also continue to monitor lenders as part of our normal supervisory work.’[1]

[1] http://www.propertyreporter.co.uk/finance/financial-black-hole-to-swallow-1m-interest-only-mortgage-customers.html