Over 1 million landlords and homeowners with interest only mortgages could face financial difficulties when reach the end of their tenure and they have to pay them off, according to the Financial Conduct Authority (FCA).
The FCA estimates that around half of the 2.6 million or so UK property owners with interest only mortgages, which represents about a third of all UK mortgage holders, will not have savings or other funds to cover the final bill.
With these mortgage holders only paying enough to cover the monthly mortgage interest on the amount borrowed, the average shortfall is £71,000 (GBP) per person, according to FCA research.
The FCA, the successor of the Financial Services Authority (FSA) as the sector’s watchdog, commissioned research to give a clear indication of what borrowers face when mortgages mature between now and the year 2041.
Market research firm GfK NOP questioned 1,103 interest only mortgage borrowers to consider how prepared they were to repay their loans.
The study found that 37% of borrowers with an interest only mortgage faced a shortfall in their plans to pay back the lump sum of the home loan, based on their own calculations.
But the FCA believes that many people have seriously underestimated the severity of the financial problem and believe the true percentage to be around 48% of all residential property owners with interest only mortgages will face a shortfall.
The vast majority of interest only mortgages were taken out by property investors and residential homebuyers before the financial crash, according to Martin Wheatley, Chief Executive of the FCA, who stated: “It’s just that people were optimistic about the future. My advice to borrowers is not to bury their head in the sand. This report is a call to action.”
The interest-only mortgage time bomb is a serious problem for property investors without an exit strategy and potentially terrifying for homeowners who have no means in place to repay the capital of the original loan.
The media have already stirred up a fervour of anguish with overemphasised coverage on the negative aspects of taking out an interest only mortgage, almost as if they are acting in the interests of the mainstream mortgage lenders attempting to get property owners to switch to repayment mortgages immediately.
The media coverage suggests that interest-only mortgages are a disaster waiting to happen for property investors and residential homeowners with at least 60,000 borrowers facing capital repayments by 2020 without any means of being able to pay back the loan and another 260,000 facing the same financial crunch over the next 30 years.
Graham Lock of House Network said that the FCA is guilty of scaremongering, stating: “People use interest-only mortgages to get on the ladder and they can choose to switch to a repayment option at any time once it becomes affordable. Wage inflation will take care of most of this added with the fact that most of us will work until we’re 70 means there is plenty of time to switch to repayment in the future.”
Executive Director of the Intermediary Mortgage Lenders Association (IMLA), Peter Williams, added: “By confirming that nine in every ten interest-only (IO) mortgage borrowers have a repayment strategy in place, the FCA’s research should put an end to misguided reports of a mis-selling scandal when the market boomed between 2002 and 2007. Having said that, as both the Experian report for the FCA and the GfK report shows, there are issues for the industry to deal with.”
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