Financial Conduct Authority warns about the long term risk of interest only mortgages
The Financial Conduct Authority (the jazzy new title for the body that regulates the financial services industry, including mortgage advisers like ourselves), after previously describing interest-only mortgages as a ‘ticking time bomb’, has published the findings of research it has carried-out into interest-only mortgages and people’s ability to pay those mortgages back at the end of the term – http://www.guardian.co.uk/money/2013/may/02/interest-only-mortgages-storing-up-trouble
Interest-only mortgages involve the borrower only paying the interest on the mortgage and not actually paying-back the sum that was borrowed during the term of the mortgage. So the borrower needs another way to pay back the loan to the lender at the end of the mortgage term (for example, at the end of 25 years).
A lot of people expected that a continued rise in property prices would take care of repaying the mortgage at the end of the mortgage period. Of course, the housing market has not been in the best shape for the past few years, after a crash in 2008, so alternative methods of repaying a mortgage have had to be considered. With a large proportion of people who took large mortgages with a high loan-to-value percentage prior to the crash (e.g. 95% or even 100%) being in negative equity, this is even more important. The research identified three ‘peak periods’ when interest-only mortgages will mature, with the first of these being 2017-18, meaning that a lot of people at the moment need to think about a fairly imminent potential problem.
Having listened to a phone-in on Radio 5 this morning, opinion seems to be pretty divided as to whether or not lenders sufficiently flagged-up to borrowers, at the time when they took out their interest-only mortgage, that they would need to find some way of paying-back that borrowing.
What also occurred to me when I was listening to the phone-in was the difference between those people who had gone direct to their lender and those who had taken independent advice. The ones who had gone direct to the lender seemed far more critical of the level of advice they had been given about how they would repay the loan when compared with those who had taken professional, independent advice and who seemed far more accepting of the fact that they knew they would have to find a way to pay back their mortgage. These people also seemed more accepting of the fact that, if that repayment ‘vehicle’ (an ISA or a bond, for example) fell short of the mortgage amount at the end of the mortgage term then they would have to find some other way of paying that shortfall. These are of course only isolated examples on a radio talk show but the difference in tone was striking.
It’s isn’t too late to get quality, independent advice about your mortgage situation though if you are worried that you might fall into the category above. If you are on an interest-only mortgage and do have any questions or concerns about whether it is the right type of mortgage for you or about how you are going to repay the mortgage at the end of the term, please don’t hesitate to get in touch with us for a chat.