The report from Mortgage Achilles, BDRC Continental’s annual study of the “mind of the mortgage market”, looks at the “ticking time bomb” issue from the standpoint of interest-only mortgage holders. It questions how people who have these mortgages intend to pay them off at the term end.
BDRC Continental estimates 1.8 million homes in the UK are on an interest-only mortgage, around19% of all home purchase mortgages in the UK. And 12% of those with an interest-only mortgage say they intend to repay the capital by selling their home at the end of their mortgage term – that represents 216,000 home owners.
Looking more generally at repayment plans for all interest-only mortgage holders:
• 39% have no investment plan to clear the debt (700,000 borrowers) – a total mortgage value currently of around £75bn
• a further 400,000 (22%) have an investment plan but it’s not on course to clear the debt – a total mortgage value of £45bn
• one in three (31%) have an investment plan that is on course to clear their mortgage (560,000 out of 1.8 million) – a total mortgage value of £65bn.
Still time to act
The BDRC Continental Mortgage Achilles survey shows that, while outstanding debts are the bad news, in some cases the end of the mortgage term is well into the future. Among those with no investment plan almost half (48%) have over 15 years to go to full term, which means that many holders of this kind of mortgage still have time to seek advice and make proper arrangements for clearing the commitment. However, one in 14 reach the end of their mortgage term in the next five years. In those cases, there is less time to decide upon appropriate action.
Among those with no investment plan, almost a quarter (23%) expect to switch to a repayment mortgage, while 16% either mentioned selling the property or using cash savings to repay the capital. Worryingly, a quarter (26%) said they did not know how they would repay the capital.
Those with an investment plan that is not on course to repay their mortgage most often mentioned using an endowment policy (29%), cash savings (26%), switching to a repayment mortgage (17%) or selling the property (12%) as the means to repay.
Other methods mentioned included overpaying the mortgage, money from an inheritance and stock market investments.
Lenders and the Financial Services Authority have severely tightened the availability of interest-only loans. Their next step may be to help people identify the best way to pay off their commitment.
Tony Wornell, Director at BDRC Continental, said:
“Our research suggests that some interest-only borrowers are not engaged with the end game – what will happen when their mortgage term finishes and they have to repay the capital. Everyone with an interest-only mortgage needs a credible repayment plan. Changing to a repayment mortgage is the most certain solution but if that is not possible, borrowers could consider overpaying the mortgage or building up cash savings if they do not like the idea of an investment plan.
Some borrowers are using a mix of methods to ensure they can clear the capital. Whatever the plan, regular review is important in staying on course. It could help if lenders got involved in this review and feedback process rather than leaving it entirely to the borrower.”
