Interest-Only Mortgages a “Ticking Time Bomb”

February 21, 2013

Only one in three households with interest-only mortgages has a repayment plan set up, according to new research.

Nearly 4 million households in the UK have interest-only mortgages. This type of mortgage requires the borrower to pay only the interest each month, but none of the capital. The capital is then paid off at the end of the deal, which is usually 25 years. However, research by independent analyst BDRC Continental has shown that 39% of holders have no repayment plan at all, while a further 22% have plans to repay but are not on course to clear their payments, leaving a total value of £120 bn in unreliable mortgage debt.

These troubling figures show that many households are in danger of losing their home when their current rate expires or changes.

According to a survey done of 7,000 interest-only mortgage holders by website MSN Money, 58% of the respondents stated that they simply did not have enough money to repay their interest-only mortgage, whilst 22% were relying on house prices rising in order to be able to repay.

Last year, Martin Wheatley, head of City regulator the Financial Conduct Authority, referred to regulation of interest-only mortgages as “a ticking time bomb”, where thousands of homeowners would not to be able to pay the capital of their mortgage.

As this ‘ticking time bomb” seems set to come to fruition, BDRC Continental director Tony Warnell has warned, “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.”