If you’ve got an interest-only mortgage urgently check you will be able to pay the balance at the end of your mortgage, if you’re worried you won’t be able to pay, seek help on what you can do.
What does FCA Suggest:
Back in 2013 the FCA also identified three residential interest-only mortgage maturity peaks. The first is happening now and is affecting those nearer retirement, but these people have more modest shortfalls and higher levels of equity, making them lower risk, the FCA says.
The next two peaks are 2027/2028 and 2032, and the FCA says “people are most at risk of being unable to repay their mortgage as they are likely to be less well-off and have lower equity levels”.
As part of its latest review into the issue, the FCA looked at 10 lenders, which represent around 60% of the interest-only residential mortgage market, to see how they are helping customers to ensure their mortgages will be paid off.
It found lenders are trying to work with their customers on repayment strategies, but there were still improvements to be made including deciding when and how to contact customers, and making the processes easier, such as having shorter wait times to speak to an adviser.
Jonathan Davidson, executive director of supervision retail and authorizations at the FCA, said: “We are very concerned that a significant number of interest-only mortgage customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.”
It is recommended that people with interest-only mortgages contact their lenders to discuss repayment options as it is feared that some will not have the means to repay the capital at the end of the mortgage term.
The FCA estimates that 20% of mortgage customers have an interest-only mortgage, this is where a borrower pays only the interest on the mortgage and does not repay the capital as part of the monthly payment. Many of these types of mortgages were taken out during the property boom between 2000 and 2007 when this mortgage option was an attractive way for borrowers to get onto the property ladder.
Borrowers willingly signed up to these interest-only mortgages, but some may not have read the small print or fully understood what they were signing up to, instead just seeing a cheaper monthly repayment and not thinking about how they would eventually repay the capital sums borrowed. If a homeowner does not have plans in place to repay the mortgage at the end of its term, they could be at risk of losing their home. This could happen if the borrower owes more to the lender than what their home is worth. Even if that is not the case, they will lose their home unless they can re-mortgage.
The “FCA” commented that lenders are writing to their customers as their mortgages approach maturity but that a willingness of customers to engage with them to discuss affordable options for repayment of capital is still quite low. This may be because of the real fear that it could lead to the borrower losing their home (or increased household outgoings i.e. monthly cost of a repayment mortgage). The FCA estimates that there are 1.67 million full interest-only and part capital repayment mortgage accounts outstanding in the UK; this may point to many families in the UK being unable to repay the borrowing at the end of the mortgage term. However, for these families, the time will come when they have no option other than to take steps to address the issue.
At Acme Credit Consultants, we recognize that some of these issues may be the catalyst to wider financial difficulties from which it will be difficult to recover without entering a formal personal insolvency solution such as Bankruptcy or IVA, Whilst we are not mortgage advisors and cannot advise on how best to deal with your mortgage issues, here at Acme Credit Consultants, we can offer confidential and free advice with one of our debt solution experts to discuss whether one of these personal solutions may assist you in tackling your debt issues. Seeking early advice is recommended so that you can explore all options. This can assist to allow you some degree of control over your financial circumstances instead of leaving it too late. Call us on 0203 318 0990 for suitable debt advice.
Are you are on an “interest-only mortgage”, What can you do?
Here, are things to consider and steps you can take to identify an interest-only shortfall and address the problem:
- Switch to a repayment mortgage and start to pay down some of the debt. This will cause your monthly repayments to rise, but with interest rates at historically low levels in the year 2019 is a good time to remortgage and lock in a low rate.
- Pay from your existing savings/cash towards your mortgage to bring your mortgage balance down. Save funds to fill the gap between capital outstanding and zero balance. The earlier you start, the better.
- If your lender permits, you could extend the term of your loan to give you more time to build up funds to pay off the debt.
- Switch to a half-and-half mortgage. As the name suggests, this is a mortgage where half is on a repayment basis and the rest is interest-only. This allows borrowers to pay down the debt, but with less of a financial burden than moving to a full repayment deal. A mortgage broker will be able to offer advice on which lenders can help.
- Make overpayments as you are allowed to pay up to 10 % of your mortgage balance. Even if you’re unable to switch your loan, in most instances you will be able to make overpayments on your current interest-only mortgage and reduce the debt.
- Consider equity release. For older borrowers it can be especially difficult to get a new loan with a high street lender, meaning many are turning to equity release or lifetime mortgages. These mortgages are designed for those in later life as the interest and capital are only paid off when the borrower dies or leaves the property permanently, for example for a move into long-term care.
- If you are on a relatively high rate mortgage, check if you can remortgage given rates remain quite low. You may not pay that much more on repayment than on an interest-only if you move from a high rate to a cheaper one.
- If your after-tax rate on savings is lower than your mortgage rate, you may want to repay your mortgage with savings. Check for penalties for overpaying first. Savings rates are normally lower than mortgage interest.
- You could try to go part interest-only, part repayment, if you have the cash, pay it towards the mortgage balance as you are allowed to pay a certain percent of your mortgage balance without a penalty. Or you could switch to a repayment mortgage if you have plenty of spare funds each month.
- If you’re at risk of losing your home now, two Government schemes could help: Support for Mortgage Interest, and, if you’re facing repossession, the Mortgage Rescue scheme.
- If your chosen plan is to sell your home, even if the value is larger than the mortgage, you need some legroom in case the value drops.
- If you plan to sell, where will you live? Make sure you consider that. If you downsize your home, will it be big enough?
- If you have an endowment, sadly, misselling cases are, by and large, no longer possible because the time limit has passed If you need help switching mortgage, try an independent mortgage broker.
- Release funds from Cash ISA, other savings, and investment and pay towards your capital mortgage balance, it may be that your savings are giving you lower returns than your monthly mortgage payment.
The FCA confirmed in its last findings in 2013 that it had not found any evidence of widespread misselling of interest-only mortgages. If you are worried about your debts, please contact us on 0203 318 0990 for a free and confidential appointment