Single-interest mortgages plummet, but paying them off remains a concern for many
- FCA regulator says number of interest-only mortgages has halved
- However, many have no plans to pay these mortgages, and time is running out.
- One in five said they didn’t know they had to repay the loan when the term ended.
The number of interest-only mortgages has been cut in half since 2015, but many borrowers still in deals still face being left with homes they can’t afford.
There are now 750,000 interest-only and 245,000 part-interest mortgages, according to the Financial Conduct Authority regulator.
In all, 12 percent of homeowners now have these offers.
The FCA said the drop is due to people switching from interest-only mortgages to down payment home loans or paying off the debt in full.
But many of the one million people who still have interest-only mortgages are facing a crisis they are unprepared for: what happens when the term of their mortgage ends.
We Can Work It Out: Many interest-only homeowners have to come up with a plan to pay off their mortgage in full.
About 22 percent, or one in five, people with interest-only home loans told the FCA they didn’t know they had to pay their mortgage when its term ended.
About 18 percent of people with these mortgages weren’t sure how they would repay them, and FCA figures suggest nearly half of all interest-only homeowners won’t have enough money to pay their lender.
As the name suggests, an interest-only mortgage means that the borrower only pays the interest on their home loan, not the balance.
This makes monthly mortgage interest payments cheaper than payment mortgages, where homeowners pay both the interest and the balance.
But interest-only mortgages come with a sting in the tail. Once homeowners reach the end of their term, they will not fully own their property, even if they have managed to pay off part of the balance.
Then they have to sell the house to pay off their lender or rely on another source of cash, such as maturing investments or large inheritances.
Interest-only mortgages were much more common in the easy-credit days before the 2008 financial crisis.
Some people still have mortgages taken out before then, and time is running out for many interest-only homeowners to come up with a plan for what will happen when their term is up.
THE TIME BOMB
About 51,000 of these interest-only loans are due in four years, in 2027.
About 72,000 more will run out in eight years, or 2031, and another 77,000 will run out in nine years, or 2032.
Homeowners who are moving out of interest-only mortgages and looking for new home loans may struggle with the higher prices they are used to.
The average two-year fixed-payment mortgage is now 6.63 percent.
If current predictions are correct, that price is unlikely to fall much in the next few years.
This is because the Bank of England base rate is projected to stay above 4 percent until at least 2028, although this is all based on market predictions alone.
That’s important because the base rate factors directly into the price of variable-rate mortgages and indirectly affects fixed-rate home loans as well.
>>What to do if you are having trouble paying your mortgage payments
The FCA said borrowers without a repayment plan should talk to their lender to discuss their options.
FCA retail banking director David Geale said: “While it’s encouraging to see the number of interest-only mortgages shrinking faster than expected, with most loans written off or transferred to other products, the challenge remains for a significant number of borrowers
‘Taking out an interest-only mortgage can mean lower monthly payments, but borrowers need a plan to pay off the outstanding balance when the mortgage comes to an end.
‘If you have an interest-only mortgage and aren’t sure if your current plan is enough, talk to your lender as soon as possible to discuss your options.’
What to do if you need a mortgage
Borrowers who need to find a mortgage because their current fixed rate agreement is coming to an end, or because they have agreed to purchase a home, should explore their options as soon as possible.
This is the best Money Mortgage Rate Calculator powered by L&C that can show you offers that match the value of your mortgage and property
What if I need to re-mortgage?
Borrowers should shop around and talk to a mortgage broker and be prepared to act to secure a rate.
Anyone with a fixed rate agreement that ends within the next six to nine months should consider how much it would cost to remortgage now and consider closing a new agreement.
Most mortgage deals allow fees to be added to the loan and are then only charged when you withdraw. By doing this, borrowers can lock in a rate without paying expensive setup fees.
What if I am buying a house?
Those with agreed home purchases should also aim to lock in rates as soon as possible, so they know exactly what their monthly payments will be.
Homebuyers should be careful not to stretch themselves too far and be prepared for the possibility of house prices falling from their current high levels, due to higher mortgage rates limiting people’s borrowing capacity.
How to Compare Mortgage Costs
The best way to compare mortgage costs and find the deal that’s right for you is to talk to a good broker.
You can use our best mortgage rate calculator to display offers that match your home value, mortgage size, term, and fixed rate needs.
Keep in mind, however, that rates can change quickly, so the advice is if you need a mortgage, compare rates and then speak to a broker as soon as possible, so they can help you find the right mortgage for you. .
> Consult the best fixed-rate mortgages that you could apply for