Financial black hole to swallow 1m interest-only mortgage customers

Citizens Advice has voiced concerns that almost 1 million people are facing financial ruin and could have their homes repossessed because they have no way of paying off their interest-only mortgages.

Related topics:  Finance
Warren Lewis
4th September 2015
black hole

The startling new research from the national charity estimates 934,000 people have interest-only mortgages and do not have a plan on how to pay it off when their term ends. Time is running out for some people who will either have to sell their homes, find the capital to pay off the debt or could risk having the property repossessed.

Some of the people who came to the consumer champion said they  were not made aware that they would need to repay the capital at the end of their term. The average shortfall was previously estimated to be £71,000.

The charity says that in the UK there are 3.3 million mortgage holders who have interest-only products. Through polling it commissioned to Yougov, it estimates 1.7 million of these say they have no linked repayment vehicle, such as an endowment or ISA; 934,000 of these have no plan for repayment; and 432,727 of these people have not even thought about how they will repay the capital.

Rules were tightened in 2012 to ensure interest-only mortgages were no longer available without a repayment plan, which has resulted in a major drop in the number of products sold. Citizens Advice supports this change, but says people who already hold these mortgages need more support.

The charity is concerned that interest-only mortgage holders do not have the same protections when their term ends than when mortgage holders fall into arrears. A protocol was launched three years ago which gives lenders a legal obligation to consider alternative options before starting possession action, including extending the length of a mortgage, changing the type of mortgage and giving people reasonable time to sell their property if necessary.

But these protections do not apply to interest-only mortgages at the end of the term – at the very point when many customers discover they are in trouble.

The Financial Conduct Authority (FCA)  has said that due to previous peaks in the sale of interest-only mortgages, they expect there to be waves of potential repossessions – 2017-18, 2027-28 and in 2032.

In 2013 the FCA called on banks to contact all borrowers with interest-only mortgages ending before 2020 about how they plan to repay. But only around 30 per cent of borrowers responded.

Gillian Guy, Chief Executive of Citizens Advice, said: “People buy a home for stability – but interest-only mortgages have forced many into a financial black hole. It is good rules around these mortgages have changed, but there are many people who previously took out these products and face losing their home.

Lenders have to exhaust all other options when borrowers get into arrears – it’s time to level the playing field so that interest-only customers get the same protections when their mortgages mature. It is also important that people can get independent advice, guidance and support about how they can plan and manage their finances."

The CML, which represents mortgage lenders, said: "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."

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."

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