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Interest-only mortgages threaten homeowners

It’s all well and good buying the house of your dreams and finally claiming a spot on the property ladder, but the minute you own the keys and contract to your new property, you are in charge of paying off your mortgage which has enabled you to make your house a home.

The latest figures from Citizens Advice has shown that nearly one million homeowners cannot afford to pay off their mortgages because in order to afford a property in the first place, they have opted for interest-only loans. These estimates are a lot higher than previous years as estimated by the City Watchdog and the Financial Conduct Authority (FCA).

Interest-only mortgages threaten homeowners and around 934,000 owners do not have a stable plan as to how they will pay back the money they owe at the end of their mortgage term. Running out of time and viable ways to pay off a mortgage can place any homeowner in a likely position of repossession. The charity has claimed that for many homeowners reality sinks in without enough time to assess finances, leading them to sell their house or face repossession.

Photo credit: Willy Barton/Shutterstock

Three years ago, rules against the sale of interest-only mortgages were tightened to ensure homeowners had the means to pay back what they owed. Without the need to pay back some of the loan each month on top of the interest meant they could borrow more to buy a house of their dreams. However, the debt owed against ones house is a far greater worry for many.

More than 432,000 homeowners have confessed to not even have thought about the issue of debt and repayment. Citizens Advice chief executive Gillian Guy has said:

‘People buy a home for stability, but interest-only mortgages have forced many into a financial black hole.’

This was further emphasised by FCA’s calculation from two years ago that around 260,000 had no strategy to pay off their mortgages and also do not receive the help they need. Part of this estimation may vary according to different estimates of the number of interest-only loans. The FCA has said it currently sits at 2.6million, which the Council of Mortgage Lenders (CML) believe to have fallen to 2.4million. Citizens Advice on the other hand has estimated a total of 3.3million borrowers, with many couples having joint mortgages.

It is predicted that the first wave of repayments will appear in 2017-18, when endowment mortgages sold in the 1990’s reach their peak period of maturing. By 2027-28, the surge in interest-only mortgages taken out from the early 2000s will have reached a high point. And thus the final peak will be in 2032 when those who could not afford the interest, just before the credit crunch will have to be dealt with.

More importantly, banks and building societies have been urged to write to their customers to warn them they could be in financial danger and in some cases will have their interest-only mortgages converted into lifetime mortgages, allowing borrowers to remain in their homes through retirement whilst paying interest. The debt is then paid when they move out or pass away.

Despite an urge to prevent homeowners falling into financial ruin, Citizens Advice has claimed that more needs to be done and mortgage providers should also be phoning people, offering meetings and support to prepare customers for repayment. Greater protection for interest-only borrowers is also emphasised, forcing lenders to consider a range of alternatives before repossessing one’s home. CML who represent lenders has said:

‘Lenders will continue to communicate directly with customers in a variety of ways and to raise consumer awareness. The lender is trying to help and reduce the risk of shocks at the end of the mortgage term.’

If you are on an interest-only mortgage and facing a difficult financial period, you may consider selling your house quickly to repay what you owe. Whatever the situation, repossession is not the answer and if you find yourself in a sticky situation, contact us now for financial advice.

Feature image credit: Lifetimestock/Shutterstock

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