For years, many experts have been warning of an interest only mortgage ‘timebomb’ with millions of interest only borrowers approach the end of their mortgage term with no way of paying back their home loans. Unless you’re a high net worth mortgage borrower it’s rarely been harder to get a new interest only deal and many high street lenders have withdrawn this type of lending.
Now, the Daily Telegraph reports that ‘the banking industry has finally taken steps to defuse the ticking time bomb of interest-only mortgages.’ The new City regulator has stepped in to tackle the problem of interest only mortgages.
Banks instructed to contact interest only borrowers with warnings
After years of inaction, banks have now been instructed by the Financial Conduct Authority to contact interest only borrowers who at risk of defaulting on their home loans. Around 600,000 home owners have to repay their mortgages before 2020 and it is estimated that around half of these will be unable to pay back their large mortgages in full.
“Many thousands of borrowers took out interest only loans in the years before the global financial downturn,” said Islay Robinson, CEO of London mortgage broker Enness Private Clients. “And, as well as offering cheaper monthly repayments than a capital and interest mortgage, they gave high value mortgage borrowers the flexibility as to how they would repay their mortgage. Often this was planned to be through the sale of other assets, bonuses or an inheritance.
“One of the problems is that many people were relying on the property market to keep growing at the same level when they initially took out their mortgage. Many people planned to sell their home in the future, make a sizeable profit after paying off their mortgage and downsize with the proceeds.
Mr Robinson, the large mortgage expert, added: “However, as the property market has stalled, this has left many thousands of borrowers stuck in a position where they simply don’t have a repayment plan in place.”
Now, banks have been told to contact interest only borrowers in order to provide information about ways of repaying these loans. The problem is particularly acute if you are nearing the end of your mortgage term. This is because the fewer years that remains, the higher your monthly repayments will be if you convert your loan to a repayment basis.
If you still have a number of years left to run on your mortgage, it’s not too late to make alternative plans. You can switch to a repayment mortgage and start chipping away at the debt, although it will significantly increase your payments. The Telegraph reports that converting a £50,000 mortgage with five years left to run from an interest only to a repayment basis will see monthly repayments jump from £125 to £898.
While experts have welcomed the move to require banks to tackle this issue, many believe that they can do more. Mr Robinson, the high net worth mortgage advisor, adds: “Lenders should be providing clear information on the options that are available in order that borrowers can make an informed decision. Warning high value mortgage customers is a first step but anyone who is worried about how they are going to repay their large mortgage should seek professional advice sooner rather than later.”