The interest-only mortgage holders in need of ‘wake-up call’

Around 2.6 million interest-only mortgages are due for repayment over the next 30 years, but new research by the industry regulator has revealed that one in 10 people on such a deal have no plan for paying the money back.

The Financial Conduct Authority (FCA) fears that consumers are under-estimating the scale of the problem and it plans to work with the Building Societies Association (BSA) and the Council for Mortgage Lenders (CML) to contact borrowers within the next year about their repayment plans.

It is feared that some home owners could end up having to sell their property to pay the loan back if they do not take stronger control of their repayment planning.

‘Over-optimistic’ about repayments

Around one third (37 per cent) of interest-only borrowers surveyed said they may not have enough cash put by to repay their loan, although projections compiled for the FCA suggest people are being “over-optimistic” and this figure may be closer to half (48 per cent).

Borrowers thought their shortfall would be around £22,100 on average. However, estimates for the regulator suggest that around half these shortfalls will be more than £50,000.

These projected shortfalls were based on the future value of all savings, investments and property values that people intended to use to pay off their interest-only mortgage.

What to do if you are worried about your interest only mortgage - from the Money Advice Service

If you don't have a repayment plan act now:
Add up your savings - could you use them to reduce the loan? If so, does your lender allow overpayments
Contact your lender to ask about switching to a capital and interest mortgage which will start to repay the original loan
Ask about switching to a part repayment, part interest only loan
Consider extending the length of your mortgage to give you extra time to pay
You could speak to a financial adviser to see how much you would need to invest to cover the cost of the loan by the end of the term

If you do have a plan for repaying the loan:
Check how many months and years your mortgage has to run
Contact your investment provider, fund manager or financial adviser and ask if your investments are on track to repay the mortgage
If they're not, get an estimate of how much extra you need to invest
Now contact your lender to ask if you can make overpayments - ask about fees or early repayment charges for doing so.
Ask your lender and investment provider or financial adviser to help you choose the best course of action.

For more advice from the Money Advice Service click here

Consumer campaigners have also raised concerns that a “significant” number of people claimed to be unaware how their loan was meant to be paid back when they took the product out and called for further work to make sure some borrowers were not mis-sold deals.

New plans unveiled by Chancellor George Osborne for a “help to buy scheme” in March will help reduce the need for interest-only mortgages.

Participants need a 5 per cent deposit, with the government lending 20 per cent of the value of a home through an equity loan.

This loan can be repaid at any time, including when the home is sold.

People have to secure a 75 per cent mortgage from a bank or building society on a home worth up to £600,000.

Borrowers ‘not sure a plan was needed’

Some 13 per cent of interest-only borrowers said they were not aware when they took out the deal that they needed a plan in place to repay the whole amount borrowed, not just the interest – and a further 6% were unsure.

However, those who said they were unaware of the need for a repayment strategy were more likely to have taken out the deal longer ago and just one in 40 people (2.5 per cent) who said they were unaware still has no repayment plan in place.

Richard Lloyd, executive director of consumer group Which? said: “We’re worried that a significant proportion of consumers say they did not know they needed a separate repayment plan on their interest-only mortgage.

“We hope the FCA looks into this further to establish whether lenders made it completely clear to interest-only borrowers that they would need a repayment plan, to be sure that there wasn’t widespread mis-selling.”

The FCA said that the regulator is concentrating its efforts on making sure that the people whose interest-only mortgages are maturing will have a way of paying their loan back.

‘No suggestion’ of a widespread problem

It is thought that despite the report’s findings, there are no particular jumps in mortgage complaints figures to suggest that the way that interest-only mortgages were sold was a widespread problem.

A CML spokeswoman said that the body’s focus will be on helping those who still have no strategy in place for repaying their mortgage.

Of the 13 per cent who said they were unaware what the deal entailed, she pointed out that many of these people will have taken out their mortgage deal “decades ago” and there may be “all sorts of issues” about their perception of what happened.

The FCA’s findings will step up the pressure on lenders to increase their communications to borrowers on interest-only deals. The initial focus will be on people whose mortgages are set to finish before the end of 2020.

Interest-only mortgages allow borrowers to pay off the capital only when the mortgage term ends, enabling them to maximise their borrowing capacity.

However, they have become much more thin on the ground since the boom years amid concerns about people not being able to pay back their debt.

The CML said lenders may be able to offer alternatives to some customers to help them avoid having to sell their home in order to repay the mortgage.

Most people ‘have time to plan’

But customers have no automatic right to this, and any alternatives on offer will depend on the circumstances of the borrower and the lender’s policy.

Paul Smee, CML director general, said: “Most people, even if they have not yet done so, have time to plan a satisfactory strategy for when their mortgage reaches maturity.”

FCA chief executive Martin Wheatley said: “By acting now we are aiming to nip this problem in the bud.

Mr Wheatley said that borrowers must be prepared to communicate with lenders.

He said: “My advice to borrowers is to not bury your head in the sand – take action now.”

The research focused on home owners who lived in the property and did not include buy-to-let mortgages.