by Mark Johnston
The Ticking Timebomb!
It seems that many home owners who took out interest only mortgages, particularly from 2007 to 2008, are now worried about how they will repay their loans.
Current analysis shows that the capital on 2.6 million interest only home loans will be due for repayment over the next 30 years.
Before the financial crisis around one in three borrowers signed up to an interest only mortgage and they therefore gained massive popularity.
Interest only mortgages were popular because they allowed people to become home owners with small deposits and at a relatively low monthly cost when compared to capital and interest mortgages.
On the whole these home owners had no repayment vehicle in place and did not know that they would need a repayment vehicle at all. It seems they simply expected the value of their homes to rise enough by the end of their mortgage term to be able to repay their loans.
Chadney Bulgin, mortgage partner at Jonathan Clark, says “I find it very hard to believe that interest only borrowers were apparently oblivious of the need to have a repayment plan in place”.
Although, no one could have seen the financial crisis coming and with it came a very depressed housing market.
Therefore many households have now found themselves in negative equity, meaning they are unable to sell their property to cover their loans and they are also unable to switch to a capital and interest mortgage.
A recent report by the Financial Conduct Authority (FCA) reveals that around 1.3 million home owners with an interest only mortgage face an average shortfall of more than £71,000.
These figures have then fuelled fears within the industry that those households left with a shortfall could potentially have to keep making monthly mortgage payments well in to their old age and they may even face repossession.
Moody’s, the leading ratings agency, has claimed that in some extreme cases, borrowers could service these loans until their death.
There are still however some options for those households with an interest only mortgage but the longer they leave things the fewer options they will have.
Firstly the borrower should contact their lender and ask about possibly switching to a part repayment and part interest to start with or ask about the possibility of extending the term of the mortgage in order to gain extra time to pay towards the original loan.
Home owners could also speak to a financial adviser who may be able to recommend how and where to invest money to cover the mortgage by the end of the term.
Paul Smee, director general of the Council of Mortgage Lenders (CML), adds “more people, even if they have not yet done so, have time to plan a satisfactory strategy for when their mortgage reaches maturity”.
The Council of Mortgage Lenders (CML) has said that many of its members will now be stepping up contact with borrowers of interest only loans.
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