69% of borrowers with interest-only mortgages do not have a repayment policy in place

2nd November 2015


Almost three-quarters of homeowners with interest-only mortgages are concerned they may not be able to repay their loan, according to research from Ocean Finance.

The survey found that a worrying 69% of borrowers do not have a repayment policy in place

Interest-only deals mean borrowers pay the interest on the loan during the life of the mortgage and then must repay the capital when the mortgage term ends.

They became very popular in the 1990s as a way for consumers to afford homes at a time when property prices were soaring.

Lenders often agreed interest-only loans without confirming borrowers could repay the capital owing at the end of the mortgage. By the end of 2012 most lenders stopped offering interest-only deals after tightening their lending rules.

But the mortgage broker’s survey found that just 31% of those interest-only borrowers questioned said they have a separate investment policy in place, such as an endowment or an ISA, to repay the capital.

While 16% said they plan to switch to a repayment mortgage before their current loan ends, 31% said they expect to have to sell their home to settle the outstanding capital while 20% said they do not have a plan in place to repay the capital.

Commenting on the results, Gareth Shilton, Ocean’s spokesperson, says: “Interest-only has become a time-bomb because so many people took out the products to cut the cost of their mortgage, with no view of how they would repay the capital element. Borrowers who have an interest-only mortgage with no repayment plan need to take action.

“It’s advisable to seek advice on whether they can overpay on their current interest-only deal, switch to a repayment mortgage, or use an ISA or pension to settle the capital payment.”

The research also showed that just over a fifth of borrowers with interest-only mortgages do not feel they were given adequate advice about repaying the capital portion of the loan when they took out their mortgage.

Shilton adds: “While there is a place for interest-only mortgages, it is a specialised product that suits a small number of borrowers, rather than being the mass market product it became in the 1990s. For example, if you have a large family home that you know you don’t plan to stay in once your children have left home, then interest-only could make sense.

“Interest-only mortgages are now typically only being approved for borrowers who can demonstrate they have a repayment vehicle or pension pot that is forecast to repay the capital element. Usually, borrowers also need to have a significant deposit that gives them a big equity gap.”

2 thoughts on “69% of borrowers with interest-only mortgages do not have a repayment policy in place”

  1. Anonymous says:

    I recommend that interested parties observe how very little in banking behaviour has become unscandalous since the beginning of the crisis. Now they abuse their customers in new ways , in particular frustrating existing borrowers from extending their mortgage terms.
    Let us look, for instance, at the former world biggest bank, RBS, an acronym that could stand for many unflattering but apt descriptions , such as Royal BS .Its behaviour was stupid, self serving and avaricious but for a period it partnered and appeared to hold the hand of home owners , literally none of whom committed even a minute fraction of the errors of judgement this and other lenders committed continually. Many smaller fish were worse . But if a company exists for its shareholders then collectively this bank is owned on behalf of the citizens.

    The rewards of the Public bailout is that this rescued entity now persecutes a substantial chunk of its customers who now need to accommodate some new realities.

    But they , as citizens who may not claim expertise in financial forecasting, are being held to much higher standards of honesty , competence and future predictive ability , than the multi billion institution with its layers of experts and teams of functionaries.

    Unless this becomes a political issue and the new behaviours of blaming the Council of Mortgage Lenders for their pernicious actions is unchecked up to a million –perhaps more can lose their homes and dreams for no good purpose .

    Some , a million of more, will become either homeless or thrown into the arms of high interest bailout bandits.
    Some will become State dependent . Some will die from their arteries not coping with the stress. Many more will die prematurely than from any causation from the VW extra pollution. Yet the scandal is muted.

    Its a new crime on Governor Carney’s watch , with his pay per view thoughts , being whispered to by a Chancellor who considers this a worthwhile price and the negative consequences for the million or so , a blip , or as Stalin said of a million deaths , a statistic.

    Does this need another dead body on a beach as in the tragic circumstances in Turkey to motivate even a pretense of comprehension for the patent injustice?

  2. Jive Bunny says:

    These people may view their “mortgage” as “rent” never intending to repay, depending on the mortgage being paid off when the house is sold, assuming it has not slipped into negative equity.

    It’s not bad plan as it goes because your interest payments are based on the original amount borrowed, subject to the vagaries of UK interest rate policy which has been stuck low rates for about 7 years now with forward guidance being that they will remain low for years to come, providing a stable low monthly payment to meet.

    This contrasts with the rental market where to quote Yazz “the only way is up” for your rent with annual rent increases to look forward to.

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