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Nearly one in five mortgage customers have an interest-only mortgage, which means they're not actually reducing their loan, but are simply paying off the interest every month. A review by the Financial Conduct Authority (FCA) shows that many of these borrowers have not yet talked to their lender to figure out a repayment plan, leaving them at risk of losing their homes.
There are currently 1.67 million full interest-only and part capital repayment mortgages outstanding in the UK, representing 17.6% of all outstanding mortgages. Over the next few years, a lot of these accounts will come to the end of their mortgage terms, which means those mortgages will need to be repaid.
Unfortunately, if borrowers don't have a plan to repay the capital, they may have no way of paying off that debt when the mortgage matures – and if they can't pay it back, they could lose their home. That's why the FCA is calling for action to help interest-only customers engage with their lenders and figure out which repayment option works best for them, as while lenders are contacting those customers whose mortgages are maturing, engagement rates with firms are low.
"Since 2013 good progress has been made in reducing the number of people with interest-only mortgages," said Jonathan Davidson of the FCA. "However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.
"We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons. We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take."
The FCA found that customers were more likely to engage when lenders tailored their communications, especially with those considered high risk. "We are encouraged to see that lenders have taken positive steps to engage with and help their interest-only customers," Jonathan said. "However, as the number of maturities start to increase towards 2032, it is important that lenders take time to review and, where possible, improve, their own strategies."
This includes streamlining processes for customers, as while the FCA found that many lenders were recommending appropriate repayment options – which in turn reduced repossessions - a lot of customers found the processes they had to follow challenging. Some faced delays in getting to speak to advisers, or had to make multiple phone calls and repeat information previously provided, so reducing such issues are critical.
If you've got an interest-only mortgage and are still a while off from the end of your term, consider changing to a repayment mortgage and overpaying to make up the difference. That way, you'll be more certain you can repay your mortgage at the end of the term and own your house outright. Have a look at our mortgage tables, which are mainly repayment types, to find a good deal.
However, if you're nearing the end of an interest-only mortgage deal, pay attention to the information your lender is sending you. You may have a savings account set aside specifically for the purposes of paying off your mortgage, but given how low savings rates have been, you may not have enough to cover the shortfall. Talk to your lender to see what your best option is.
Another option to pay off your mortgage could be equity release; if you meet the criteria, this could be a suitable way to clear your interest-only loan and stay in the home you love.
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