Concerns Mount as UK Homeowners Struggle with Interest -Only Mortgages
The Financial Conduct Authority (FCA) Urges Communication with Lenders for Those with Interest-Only Mortgages
New statistics reveal a growing crisis for UK homeowners with interest-only mortgages, as hundreds of thousands face the prospect of being unable to settle their loans upon the conclusion of their mortgage deals. Even more concerning, a substantial portion of these homeowners are reportedly unaware of the impending repayment obligations.
According to data from the Financial Conduct Authority (FCA), there are currently 750,000 active interest-only mortgages and 245,000 part interest-only mortgages in the UK, comprising 12 percent of all homeowners. The FCA's findings indicate that nearly half of the approximately one million individuals still holding interest-only mortgages will lack the necessary funds to repay their lenders. Of note, 22 percent of respondents admitted to being unaware of the requirement to repay their mortgage at the end of its term.
To address this pressing issue, the FCA strongly advises borrowers lacking a repayment strategy to engage in discussions with their lenders. Nicholas Mendes, a mortgage broker at John Charcol, explains that interest-only mortgages involve repaying only the loan's interest during the mortgage term, resulting in lower monthly payments compared to standard repayment mortgages. However, he highlights the crucial point that the principal amount owed to the lender remains unchanged at the term's conclusion.
Stavros Theopilou, Director in Real Estate Finance and Banking at Lawrence Stephens, underscores the potential risks associated with interest-only mortgages. He warns that when the interest-only period terminates or loan terms shift to capital repayment, borrowers may experience significant payment hikes, possibly leading to payment shock. Furthermore, if property values decline and borrowers haven't been reducing the principal loan, the risk of negative equity becomes a significant concern.
Transitioning away from interest-only mortgages presents various options, including refinancing through a new mortgage or making lump sum payments. Typically, borrowers settle the initial loan amount in a lump sum at the end of the mortgage term. Negotiations for extensions or a switch to repayment mortgages might also be viable solutions.
However, around 195,000 of the million interest-only mortgage holders are "trapped" with their current lenders, referred to as "mortgage prisoners." These borrowers, often with mortgages predating the 2008 financial crisis, face challenges in switching to more affordable deals due to stringent modern affordability criteria.
The stories of individuals caught in this predicament underscore the severity of the issue. For instance, Rebecca Wendel, a single mother-of-four, initially secured an interest-only mortgage in 2007 but now finds herself unable to qualify for a repayment mortgage due to affordability constraints. As interest rates have risen, her payments have skyrocketed, compelling her to borrow money from her mother to keep her home afloat.
These anecdotes have prompted the emergence of the UK Mortgage Prisoners campaign group, which has garnered nearly 200,000 members, advocating for support and solutions for those ensnared by interest-only mortgage complications.