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Interest-only borrowers issued with wake-up call

Interest-only borrowers issued with wake-up call

Category: Mortgages

Updated: 02/05/2013
First Published: 02/05/2013

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Hundreds of thousands of homeowners may not be able to afford to pay off the final part of their interest-only mortgage when it matures, the Financial Conduct Authority (FCA) has warned.

In its review of the interest-only mortgage market, which looked at borrowers' plans for when their mortgage is due to be repaid, the regulator found that around 2.6 million interest-only mortgages are up for repayment over the next thirty years.

Whilst an encouraging nine out of ten borrowers said they have plans in place to repay their mortgage, the remaining 10% said they currently have no strategy in place at all, leaving them at serious risk of defaulting.

The FCA believes that around half of mortgage shortfalls will be at least £50,000, with some borrowers stating that they will have to dip into savings or downsize their home in an effort to make the repayment.

Mortgage lenders have confirmed they will work alongside the Council of Mortgage Lenders, the Building Societies' Association and the FCA regarding the matter, and will be contacting their most at-risk interest-only mortgage customers to determine whether they have a repayment plan in place and assist them with the options available.

Many people choose to take out a mortgage on an interest-only basis, as they allow borrowers to pay off a smaller amount each month. However, unlike repayment mortgages which pay off the interest and the capital on the amount borrowed, it is only the interest which is paid off.

Borrowers will be expected to repay the remainder of the home loan when the mortgage term ends.

Martin Wheatley, chief executive of the FCA, said: "We welcome this move and also the sector's commitment to helping its customers try and find a solution, but people must engage with them.

"My advice to borrowers is to not bury your head in the sand – take action now. Understand the terms of your mortgage agreement and take control; work out if you can repay the outstanding amount when your mortgage matures. But you must engage with your lender to discuss how you propose to repay the outstanding loan.

"This is a landmark piece of work and it comes at a critical time: lenders, regulators, and borrowers need to ensure that they grasp the nettle now before it is too late," he warned.

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