Interest only mortgages – What are the options?Posted on: 09 May 2013 by Ronan Marrion
Ronan Marrion looks at interest only mortgages and stresses the importance of understanding your payment plan to avoid a potential shortfall.
You may have seen or heard a good deal of media coverage on Interest Only Mortgages. That is because the Thematic Review into Interest Only Mortgages has now been published by the Financial Conduct Authority (FCA), with the headline numbers being;
- There are approximately 2.5 million households with Interest only Mortgages
- Approximately 10% of households will not be able to repay the capital sum at the end of the term
- The peak of the exposure will be reached in 2027 and 2028 (1)
- Approximately half of these will have a shortfall - average circa £71,000 (2)
The good news is that although it is an issue and will need addressing by many mortgage holders the general view from the report is forward looking at how problems can be made better. The FCA view appears to be that people knew what they were buying and are responsible for keeping to their agreed plans to repay the capital of their mortgage.
This is the latest in a line of warnings about interest-only mortgages, which have helped millions of people on to the housing ladder during the past two decades but have recently become the subject of a regulatory clampdown.
No idea how to pay back loan
With this type of home loan, the borrower agrees to pay off the interest each month but makes no capital repayments. Borrowers are expected to make sure they have an investment plan in place – traditionally that could have been an endowment policy – to pay off the debt at the end of the term. However, not everyone does, and the FCA's predecessor, the Financial Services Authority, became increasingly concerned that some homebuyers could be storing up problems for the future because they had little or no idea of how they would pay back the loan. Some mortgage lenders have now stopped offering this type of deal. (2)
The head of the FCA, Martin Wheatly has said that this report should act as a "wake-up call" for lenders and borrowers to work together. Even for the most exposed there's time for borrowers to take action so that problems can be minimised before their mortgage loans end. (1)
The Council of Mortgage Lenders said its members would be stepping up their communications to borrowers, and anyone with a mortgage maturing before the end of 2020 could expect to be contacted in the next 12 months and asked about their repayment plans. (2)
Understanding repayment plan
My view is that Interest only mortgages are becoming increasingly more difficult to obtain with some lenders now actually withdrawing from offering them altogether. It is a difficult scenario as it’s understandable that lenders and the FCA are concerned that people are entering into commitments that they may never pay off, however there still is an abundance of applicants out there who have a genuine need for the flexibility that interest only offers.
For example, anyone who has a large bonus structure at work, or own their own business and has fluctuating income, can really take advantage with interest only by making overpayments to the mortgage when their income is higher.
The flip side of things is, people who are currently on Interest only and need to remortgage but can’t afford to switch to repayment. It is worthwhile taking the time to discuss you financial position in detail with a mortgage broker to try to ascertain what other options may be open for you.
If you have a query regarding mortgage advice please ask Ronan Marrion call 0800 0112825, e-mail firstname.lastname@example.org or take a look at our website wwfp.net.
Your home may be repossessed if you do not keep up repayments on your mortgage.
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. All information is based on our understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.
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