The Interest Only Mortgage Time Bomb

Almost three-quarters of homeowners with interest-only mortgages fear not being able to repay loan, study shows

At Doesn’t Grow on Trees we have always warned that the interest rate only mortgage was a bubble which is yet to burst, and new research by a leading finance house confirms that many home owners fear the future. If you are one of the many thousands of people who bought an interest only mortgage you may want to read this, over the coming weeks we will be publishing a series of helpful guides designed to help anyone who is worried about their interest only mortgage final payment. In the meantime if you need help today, visit our Debt Help section,

* 69% of borrowers with interest-only mortgages don’t have a repayment policy in place

* 31% predict they will need to sell their home

* 42% of interest-only borrowers say their term ends within five years

* 22% believe they weren’t given adequate mortgage advice

Almost three-quarters of homeowners with interest-only mortgages are worried they may not be able to repay their loan, research by mortgage broker Ocean Finance reveals.

Interest-only deals mean borrowers pay the interest on the loan during the life of the mortgage and then must repay the capital when the mortgage term ends. Just 31% of those interest only borrowers questioned said they have a separate investment policy in place, such as an endowment or an ISA, to pay the capital.

While 16% said they plan to switch to a repayment mortgage before their current loan ends, 31% said they expect to have to sell their home to settle the outstanding capital. And a fifth of homeowners said they don’t have a plan in place to repay the capital.

Commenting on the results, Gareth Shilton, Ocean’s spokesperson, says: “Interest-only has become a time-bomb because so many people took out the products to cut the cost of their mortgage, with no view of how they would repay the capital element. Borrowers who have an interest-only mortgage with no repayment plan need to take action.

“It’s advisable to seek advice on whether they can overpay on their current interest-only deal, switch to a repayment mortgage, or use an ISA or pension to settle the capital payment.”

Interest-only mortgages became popular in the 1990s as a way for consumers to afford homes at a time when property prices were soaring. Lenders often agreed interest-only loans without confirming borrowers could repay the capital owing at the end of the mortgage. By the end of 2012 most lenders stopped offering interest-only deals after tightening their lending rules.

The research shows that just over a fifth of borrowers with interest-only mortgages don’t feel they were given adequate advice about repaying the capital portion of the loan when they took out their mortgage.

Gareth Shilton adds: “While there is a place for interest-only mortgages, it is a specialised product that suits a small number of borrowers, rather than being the mass market product it became in the 1990s. For example, if you have a large family home that you know you don’t plan to stay in once your children have left home, then interest-only could make sense.

“Interest-only mortgages are now typically only being approved for borrowers who can demonstrate they have a repayment vehicle or pension pot that is forecast to repay the capital element. Usually, borrowers also need to have a significant deposit that gives them a big equity gap.”