Interest-only mortgages are a simple concept: you pay the lender interest and leave all capital repayment until the end of the term. Until the early 2000s interest-only mortgages were commonly accompanied by endowment policies, designed (but generally not guaranteed) to clear the mortgage at maturity. Poor investment performance and relaxed lending practices put an end to the endowment mortgage, so that the first decade of the 21st century saw many interest-only home loans with no linked repayment plan. There was also a steady flow of repayment mortgages converted to interest-only as personal finances got squeezed.
The Financial Conduct Authority (FCA – the FSA’s successor) has been investigating what will happen when the day of reckoning comes for interest-only mortgages and repayments fall due. Its research revealed three peak periods of mortgage maturity: 2017/18, 2027/28 and 2032. The final peak, driven by mortgages arranged between 2005 and 2008, is the most worrying for the regulator, because it relates to a time of high income multiples and high loan to values.
90% of borrowers said that they had a strategy (or strategies) in place for repayment and that they were ‘very confident’ (43%) or ‘fairly confident’ (32%) that they were on track for full repayment. Even so, when explicitly asked whether they were expecting a shortfall between their funds for repayment and the sum to be paid off, 22% said that they were, with a further 15% saying “possibly.”
An independent statistical analysis of borrowers’ resources revealed a gloomier picture:
- 48% of borrowers are projected to have a shortfall.
- While the average borrower fearing a shortfall estimates it to be around £22,000, the independent assessment puts the figure at nearly £72,000.
- For loans maturing by 2022, the average borrower estimated shortfall is £20,000 whereas the assessed average is £56,000. About a third of these borrowers with a maturity date less than ten years away face an assessed shortfall of over £50,000, while only about a fifth of borrowers are predicting this level of shortfall.
If you have an interest-only mortgage, do make sure that you understand your likely repayment position. As with so many other financial matters, the sooner you start planning a solution to any shortfall, the better. As they say in all the mortgage advertisements, “Your home is at risk if you do not keep up with repayments on a mortgage or other loan secured on your property.”