Investing in a home by opting for a mortgage is a huge commitment which many people undertake daily in the UK.
Having a mortgage is a great way to put money into a home which will eventually be yours without wasting valuable income on rent prices. It’s an attractive way to own your own home, and it’s becoming increasingly popular with younger homeowners.
However, according to a new report by Citizens Advice, nearly a million homeowners have no way of paying off their mortgage payments, simply because they opted for an interest only mortgage.
The findings of the report outline that a worrying estimate of 934,000 people have these types of mortgage and haven’t got a plan in place to be able to pay it off when the loan term ends.
Why Were Interest Only Mortgages So Popular?
When opting for an interest only mortgage, you are given the option of cheaper monthly payments for your home loan.
However, this doesn’t mean that you are paying back any of the debt that you owe and at the end of your loan term; you are expected to pay your lender the full amount that you borrow from them.
By doing this, borrowers are simply paying off the interest, not the capital, which makes it much cheaper than other mortgage loan options which are available.
Many of the people who have signed up for these interest only mortgages said that they were not made aware of the full capital repayment that they are expected to pay when their term comes to an end.
How Widespread is this Problem?
According to Citizens Advice, around 3.3 million mortgage holders have these interest only mortgages and estimates that:
- Around 1.7 million of these people say they have no linked repayment plan, such as an ISA or an endowment.
- 934,000 of these have no plan set in place for the capital repayment.
- 432,727 of those who have no plan haven’t even thought about how they will be able to repay the capital that they owe their lender.
In 2012, rules were changed to make sure that repayment plans were in place before interest only mortgages were offered. This change prompted a significant drop in the popularity of this particular mortgage option.
What is Being Done?
In 2013, the Financial Conduct Authority (FCA) asked banks to contact all homeowners with an interest only mortgage and ask how they planned to repay.
A shocking 30% of borrowers responded to this call. A spokesperson for the FCA stated that “We expect firms dealing with interest-only borrowers to discuss repayment strategies and propose solutions where there are no plans in place.
“While we have seen many firms progress with this, borrowers must also engage with their lenders now to resolve it, we will also continue to monitor lenders as part of our normal supervisory work.”
While there is still much more that can be done to help these people who are tied in to these types of mortgages, there are actions that can be taken to help reduce the stress and worry caused by looming debt.
Here at Burton and Fisher, we have an experienced team of financial advisors in Lancaster on hand to help you with any worries you may have regarding your finances. If you are seeking help and advice, contact one of our advisors today by calling 01524 416872 and we will be more than happy to help.