2nd May 2013
Around 1.3 million interest-only mortgage customers may reach the end of their loan term without any plan to repay their debt, according to the Financial Conduct Authority.
While the amount varies from borrower to borrower, the FCA puts the average shortfall at just over £71,000.
Hundreds of thousands of interest-only mortgage borrowers due to pay back their loans by 2020 are likely to suffer a shortfall according to a report from the City watchdog writes Phil Scott.
The Financial Conduct Authority (FCA) has published research into consumers’ ability to repay their interest only mortgages as they mature.
Interest only borrowers just pay the interest on the principal balance over the life of the mortgage. As the borrower is only paying interest, they are meant to simultaneously save sufficient cash over the term, so they can repay the principal when the loan matures.
In its report the FCA concluded around 600,000 borrowers will see their mortgage mature between now and 2020 and just under half of all interest-only mortgage home owners are likely to come up short. Of those in such a predicament, around a third are expected to have a shortfall of more than £50,000.
While the regulator says its findings have shown that many people should be in a good position to repay their mortgage, it asserts many borrowers, particularly those whose mortgage that is due to be repaid before 2020, will need to take control of their repayment planning now.
The FCA, the Council of Mortgage Lenders (CML) and the Building Societies Association (BSA) are working together to ensure lenders contact their borrowers in order to prompt them into checking their plan for repayment is on track and considering the options available to them.
Ray Boulger, senior technical manager at mortgage brokers John Charcol, says: “I do not believe this will be as serious a problem as some may believe but clearly there will be people with some difficulties, when their loan matures. Inevitably the most important factor will be house price rises.”
London and the South East of England have enjoyed strong price rises over the long term despite any falls since the property boom peak in 2007. But other areas of the UK have endured very harsh falls. Despite a recent uptick, at the end of 2012, prices of residential property in Northern Ireland sold were just under half of their peak value, a 56% fall according to data from Land & Property Services (LPS) and the Northern Ireland Statistics & Research Agency.
Boulger adds: “Northern Ireland certainly looks to potentially suffer worst as a result of its steep fall in house prices. However, I expect, in relative terms, homeowners in say London are much more likely to have taken out an interest-only loan they would have been less popular in Northern Ireland.”
The FCA’s study found that over the next 30 years, some 2.6 million interest only mortgages will be due for repayment and while 90 per cent, at 2.34 million people, have a strategy to repay their mortgage, 10 per cent – equivalent to 260,000 people – do not. In addition, it found that some borrowers are underestimating the problem as around a third believe they may not have enough money to pay off the loan, yet estimates produced for the FCA suggest the figure is closer to half. Borrowers who are able to give a figure believe their shortfall will be, on average £22,100. However estimates produced for the FCA are that around half these shortfalls are expected to be over £50,000.
Those expecting a shortfall say they will use savings or downsize to pay off their mortgage, while others said they will remortgage.
Martin Wheatley, chief executive of the FCA, comments:”“Mortgage lenders have volunteered to contact their most at-risk customers with a ‘wake-up call’ to highlight the report’s findings and what they need to do without delay. Borrowers themselves do need to respond and engage with their lenders on how they plan to repay. My advice to borrowers is to not bury your head in the sand – understand the terms of your mortgage agreement and take control.”
For interest only mortgage homeowners, there are options available. Aside from paying the outstanding loan with savings, there is equity release, where homeowners exchange some or all of the value of their home for cash. Presently homeowners aged 65 can borrow around 25-27 per cent of the value of their home. Downsizing is another option, notably equity release specialist Key Retirement Solutions found in its own research that one in five over-55 homeowners want to downsize. The firm has just launched a scheme which will help people seeking to downsize to manage the process.