Interest-only mortgage payback timebomb

Published on in Banking News by

More than two and a half million UK householders have ‘interest only’ mortgages and new data from the Financial Conduct Authority suggests nearly half of these do not have savings or other plans in place to cover their final bill.

mortgages, banksThe numbers represent about a third of all UK mortgage holders and mean that their monthly repayments simply cover the interest and don’t make any inroads into the ‘capital’ amount outstanding.

With an average shortfall of £71,000, according to FCA (Financial Conduct Authority) research, this means that when the full term of the mortgage is up some may have no option other than to sell up to pay back their lender.

Interest only mortgages are meant to be covered in the long run by savings, investments, inheritance monies or some other form of funding. However, many people who fell into difficulties throughout the banking crisis years converted to interest-only payments between 2003 and 2009.

Most of these are concentrated in the South West, East and North West of England, as well as London and the West Midlands, with an expected peak in mortgage maturations in 2027-28.

The FCA is the successor of the Financial Services Authority and as such has the responsibility of overseeing the mortgage market in the UK. The research was commissioned to give a clear indication of what borrowers face when mortgages mature between now and 2041.

Market research firm GfK NOP questioned 1,103 interest-only borrowers and found that 37% said they faced a shortfall in their plans to pay back the lump sum of the home loan.

The FCA said estimates suggest many people underestimated the financial problem and it believes 48% of holders of interest only mortgages face problems in the future.

Martin Wheatley, chief executive of the FCA, said: “My advice to borrowers is not to bury their head in the sand. This report is a call to action.”

It is important to save money for the future whenever possible, and comparing the market to find the best bank account for you is an excellent starting point.

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