If you've got an interest-only mortgage, do you have a specific plan to repay it? Hopefully you'll be saving religiously in order to have enough to pay off the capital at the end of the term, while others will be relying on rising house prices to build equity and pay off the mortgage by selling their property. But, some people have no plans in place whatsoever, and that's led to growing fears of repossession.
Citizens Advice has warned that a growing number of homeowners could be facing this very situation, with the charity estimating that some 934,000 people have interest-only mortgages without a set repayment plan. Not only that, but the average shortfall is estimated to be £71,000, a sum that would be difficult to make out of thin air.
It seems that some people aren't even aware that such a shortfall exists, with some consumers who approached the charity saying they weren't told that they'd need to repay the capital at the end of the term. This not only highlights a clear lack of communication in the industry, but suggests that many people could be in for a shock.
The rules regarding interest-only mortgages were tightened in 2012 following the fallout from the financial crisis – many people were left in negative equity as a result of falling house prices and therefore had no way to repay the loan, leading to many people being left without a home.
As a result, these mortgages are now no longer accepted unless the borrower has a clear repayment plan in place, which means there's been a significant drop in the number of plans sold. However, this hasn't helped those who already have such a mortgage, with the charity being concerned that not enough support exists for these borrowers.
Citizens Advice points out that interest-only mortgage holders don't have the same protections when their term ends than when repayment mortgage holders fall into arrears. Lenders now have a legal obligation to consider alternative options before starting possession action, including extending the length of the mortgage term, changing the type of mortgage and giving people reasonable time to sell their property (if necessary).
However, these protections don't apply to interest-only mortgages at the end of the term, despite this being the time when many customers discover they're in trouble. "People buy a home for stability, but interest-only mortgages have forced many into a financial black hole," said Gillian Guy of Citizens Advice. "It is good that rules around these mortgages have changed, but there are many people who previously took out these products and now 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."
If you've got an interest-only mortgage that's set to mature in the next few years, you'll hopefully have already been contacted by your lender to discuss your repayment options. If you weren't – or if you never got back to them – it's high time you took action, because if you aren't certain that you'll be able to repay the mortgage, you could find yourself in an unfortunate situation in a few years' time.
The first thing you should do is contact your lender to talk about your options. If you don't think you'll have the means to repay, ask about extending the term of the loan, for example, or even switching to a traditional repayment mortgage – your monthly repayments will be higher, but you'll at least be certain that you'll pay off the loan. At the very least, you'll want to be saving as much as you can in a dedicated savings account to reduce your mortgage balance as much as possible, and if you start making a plan, you hopefully won't be facing repossession any time soon.
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