ALMOST A MILLION homeowners are unable to pay their mortgages after they opted for interest-only loans, according to Citizens Advice.
The new figure from the City Watchdog, the Financial Conduct Authority (FCA) and lenders proves to be much higher than previous estimates.
934,000 owners are without a plan for how they will pay back the money owed at the end of the mortgage term says Citizens Advice and warned that time was running out for some to organise their finances.
Millions of buyers were sold interest-only mortgages before rules were tightened up three years ago. They faced having to sell their homes or even have the property repossessed if they were unable to find other funds, the charity said.
Sarah, who lives near Brighton and has an interest-only mortgage, said she and her husband could hardly afford the interest when they bought their house and frequently fell into arrears.
“We were silly. We’d just had our first baby, but they shouldn’t have given the loan. We didn’t understand what we were taking on and didn’t think about having to pay it back.”
They have 16 years until they have to return nearly £200,000, but admit the debt has become a constant worry.
Citizens Advice wants mortgage providers to do more, such as offering face-to-face meetings and phoning people to help them prepare for the day when the demand for repayment arrives.
It also wants greater protection for interest-only borrowers, to force the lenders to consider a range of alternatives before trying to repossess a home.
“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.” said CML, representative for mortgage lenders.
What is being done?
Banks and building societies have been told by regulators to write to their customers warning them of possible financial danger.
In some cases interest-only mortgages have been converted into Lifetime Mortgages, which allow borrowers to stay in their homes during retirement, paying interest if they can. The debt is paid off when they die or have to move out.
‘Financial black hole’
Citizens Advice has estimated that out of the 934,000 who have no plan in place to repay the loans, more than 432,000 have not even thought about the issue.
“People buy a home for stability, but interest-only mortgages have forced many into a financial black hole,” says the charity’s chief executive, Gillian Guy.
Two years ago the FCA calculated that a far smaller number, around 260,000, had no strategy to pay off their mortgages. Part of the explanation could lie in different estimates of the number of interest-only loans.
The FCA put it at 2.6 million, a figure which the Council of Mortgage Lenders (CML) believes has fallen recently to 2.4 million.
A spokesman for the FCA said: “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.
Between 2017-18 is when the first obvious wave of repayment problems are expected to begin- as the endowment mortgages sold in the 1990s reach their peak period of maturing.
Ten years later in 2027-28, interest-only mortgages taken out in the early 2000s will reach a high point.
The final rise will be in 2032- this will deal with the people who were lent the loans just before the credit crunch, despite being able to just afford the interest.
