Interest-Only Mortgage-Holders Unprepared, says FCA

Interest-Only Mortgages

The end of the term for interest-only mortgage-holders is set to peak over the next 10 to 14 years, and borrowers are not prepared, warns a regulator.

Almost one in every five mortgages are interest-only, which means hundreds of thousands are at risk of not being able to pay off the balance when their mortgage period ends.

Interest-only mortgages were popular in the 1990’s and early 2000’s and mean that the mortgage-holder only needs to pay off the interest each month rather than the capital. However, at the end of the term, the capital also needs to be repaid.

In most cases, people with this kind of mortgage would have it linked to an endowment policy. This is an investment fund that aims to pay a set amount on a fixed date and therefore allows the mortgage capital to be repaid upon the expiry of the mortgage term.

However, the Financial Conduct Authority (FCA) have stated that many people are simply not financially prepared for the end of their mortgage term.

Homes Are At Risk

Unfortunately, many of the endowment policies sold with mortgages are not due to pay out a high enough amount to cover the original mortgage. This means that some homeowners will need to pay off their mortgage using other means, or risk having their property repossessed.

Jonathan Davidson, Executive Director of Supervision – Retail & Authorisations, said “Since 2013 good progress has been made in reducing the number of people with interest-only mortgages. However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.

“We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons.  We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take.”

It is vital that consumers do not turn a blind eye to this and have a clear plan for how they will pay off the balance of their interest-only mortgage when their terms end. Although the FCA are issuing clear warnings, homeowners need to take their advice on board and act before it’s too late.

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