Recent research by the Charity Citizens Advice says around a million people could have their homes repossessed because they have no way of paying off their interest-only mortgages.
Time is running out for some people who will either have to sell their homes, find the capital to pay off the debt, or could risk having the property repossessed.The charity says that in the UK there are 3.3 million mortgage holders who have interest-only products. Through polling it commissioned to Yougov, it estimates:
• 1.7 million of these say they have no linked repayment vehicle, such as an endowment or ISA.
• 934,000 of these have no plan for repayment.
• 432,727 of these people have not even thought about how they will repay the capital.
Interest –only mortgages became popular some decades ago, usually linked to an insurance policy called an endowment, both interest and premiums enjoyed tax relief.
The policy, sometimes linked to a decreasing life policy, would pay off the mortgage if the borrower died prematurely and, with its added bonuses, would ideally be worth at least as much as the mortgage amount on maturity. Lower bonus rates on with-profits endowments pointed to large shortfalls and endowment mortgages fell from grace.
Rules were tightened in 2012 to ensure interest-only mortgages were no longer available without a repayment plan, which has resulted in a major drop in the number of products sold, but thus has not dealt with the problem of borrowers who find themselves in the position of having either never had a repayment vehicle or impending shortfalls.
When lending was at its height and lenders were less diligent, some borrowers even surrendered the plans for a cash value and continued to pay interest only, and the lenders never checked up to see if a repayment vehicle was still in place, so some blame should rest with the lenders.
The Charity is concerned that interest-only mortgage holders do not have the same protections when their term ends, than when mortgage holders fall into arrears.
Lenders are now legally obligated to consider alternative options before starting possession action, including extending the length of a mortgage, changing the type of mortgage and giving people reasonable time to sell their property if necessary.
But these protections do not apply to interest-only mortgages at the end of the term – at the very point when many customers discover they are in trouble, and some borrowers who have found their mortgage being handled by administrative companies after the lender sold their loan book, are finding that they have no options.
Gillian Guy, Chief Executive of Citizens Advice, said:
“People buy a home for stability – but interest-only mortgages have forced many into a financial black hole.