Interest-only mortgages spell trouble for home-owners
Just two months ago, financial experts issued a stark warning to home-owners that they may be left with no choice but to sell when their interest-only mortgage agreements expire before […]
Just two months ago, financial experts issued a stark warning to home-owners that they may be left with no choice but to sell when their interest-only mortgage agreements expire before the end of 2017. Many agree that this represents a ticking time-bomb of a situation, threatening to place many people in jeopardy, especially those of pension age.
Research conducted by equity release lender, More 2 Life, reports that over 40% of those over the age of 65 in the UK with an existing mortgage balance have an interest only mortgage, while according to UK Finance, almost 2 million home-owners have an interest-only mortgage deal. When these expire, this could leave many with lump sums that they simply can’t afford to repay.
Interest-only mortgages are where the borrower pays only the interest accrued on the mortgage on a monthly basis for a fixed period of time – usually somewhere between 5 and 7 years. They may seem like an attractive option to many at the time deals are signed. However, a time will eventually arrive when both the mortgage capital and the interest must be paid.
UK Finance argues that 10% of those 2 million home-owners do not have a back-up plan in place for when their deals end. This means that they may simply be unprepared for such an increase in their monthly outgoings.
What happens next?
For some, there may be ways and means of finding the capital, such as with savings or the sale of shares owned. For others, putting their home on the market may be the only choice.
And there should be no doubt as to the fact that lenders will be wholly unsympathetic to the plight of those for whom it all goes wrong; they bear no responsibility for assisting home-owners to devise a suitable plan to pay the sum of their mortgages. Therein lies the fundamental issue. There exists an obvious requirement for mortgage lenders to assist borrowers in developing such a plan, so as to ensure that the future is taken into consideration when contemplating taking on an interest-only mortgage. Further, given that equity release is seen as a good solution for those who do not have a plan in place, better relationships between lenders and equity release companies would afford borrowers more potential choices and would guarantee better decision-making.
The standards of the equity release industry, which are considered by many to be comparatively high, must also be reviewed. This will permit the industry to tackle the issues presented as many interest-only mortgages reach maturity this year and in the years to come.
Nobody quite knows how the Equity Release Council (ERC), the trade body for the sector, will react as this problem unfolds. The chances are, though, that a number of new mortgage products will be released onto the market by lenders. The hope is that the ERC will welcome these with open arms and adjust its standards accordingly, minimising the impact of the ticking time bomb. But as with most things, we shall have to wait and see.