2nd November 2015
Almost three-quarters of homeowners with interest-only mortgages are concerned they may not be able to repay their loan, according to research from Ocean Finance.
The survey found that a worrying 69% of borrowers do not have a repayment policy in place
Interest-only deals mean borrowers pay the interest on the loan during the life of the mortgage and then must repay the capital when the mortgage term ends.
They became very popular in the 1990s as a way for consumers to afford homes at a time when property prices were soaring.
Lenders often agreed interest-only loans without confirming borrowers could repay the capital owing at the end of the mortgage. By the end of 2012 most lenders stopped offering interest-only deals after tightening their lending rules.
But the mortgage broker’s survey found that just 31% of those interest-only borrowers questioned said they have a separate investment policy in place, such as an endowment or an ISA, to repay the capital.
While 16% said they plan to switch to a repayment mortgage before their current loan ends, 31% said they expect to have to sell their home to settle the outstanding capital while 20% said they do not have a plan in place to repay the capital.
Commenting on the results, Gareth Shilton, Ocean’s spokesperson, says: “Interest-only has become a time-bomb because so many people took out the products to cut the cost of their mortgage, with no view of how they would repay the capital element. Borrowers who have an interest-only mortgage with no repayment plan need to take action.
“It’s advisable to seek advice on whether they can overpay on their current interest-only deal, switch to a repayment mortgage, or use an ISA or pension to settle the capital payment.”
The research also showed that just over a fifth of borrowers with interest-only mortgages do not feel they were given adequate advice about repaying the capital portion of the loan when they took out their mortgage.
Shilton adds: “While there is a place for interest-only mortgages, it is a specialised product that suits a small number of borrowers, rather than being the mass market product it became in the 1990s. For example, if you have a large family home that you know you don’t plan to stay in once your children have left home, then interest-only could make sense.
“Interest-only mortgages are now typically only being approved for borrowers who can demonstrate they have a repayment vehicle or pension pot that is forecast to repay the capital element. Usually, borrowers also need to have a significant deposit that gives them a big equity gap.”