In our latest market spotlight, we look at the problems of interest only mortgages, and why it is crucial to talk to your agent to be put in touch with a mortgage advisor that understands your situation.
The Financial Conduct Authority has warned that more than a million people with interest-only mortgages face financial problems when they have to pay them off. Some 2.6 million UK householders have such mortgages but estimates suggest that nearly half will not have savings or other funds to cover the final bill. The average shortfall is £71,000, according to the FCA, and lenders will now step up warnings to homeowners to prevent payment shocks.
Interest-only mortgages were popular when sold alongside an endowment policy in the 1990s, and again during the last decade when many homeowners banked on the rising value of their home to cover the cost.
The FCA commissioned research to give a clear indication of what borrowers face when mortgages mature between now and 2041. Researchers questioned 1,103 interest-only borrowers to consider how prepared they were to repay their loans, and found that 37% of interest-only mortgage holders said they faced a shortfall in their plans to pay back the lump sum of the home loan, based on their own sums. The FCA says this underestimates the full extent of the problem and that the real number is as high as 48%.
More critically, one in 10 – the equivalent of 260,000 people – have no repayment strategy in place at all. They face the prospect of having to sell their homes when their mortgage matures.
The watchdog said that those facing a shortfall, even if their final bill is looming within the next 10 years, should be able to find a viable way to pay the home loan back. Mortgage lenders have agreed to write to borrowers to ensure they have a repayment strategy in place, concentrating on those whose policies mature first. This way, people who might be affected can be made aware of their mortgage repayment position, and have an opportunity to take steps to alleviate future problems.
Many leading professional estate agents, such as FoxWood Maclean, have financial partners in place who can also offer independent advice and guidance. Current mortgage rates are amongst the most competitive ever seen, and for some, moving to a better deal may allow them room to increase their capital repayments. So, make sure you talk to an agent and their mortgages advisors – look before you leap and you wil hopefully land safely!
Information and data provided by Guild of Professional Estate Agents. A prospective purchaser shold not solely consider this article in their decision, and should speak to their agent and a qualified mortage advisor.