A million households with interest-only mortgages unable to pay

September 11, 2015

Lucy_2 (Custom)By Lucy Palmer-Richeson.

Nearly a million homeowners with interest-only mortgages have no way of paying off their debt and could face repossession, according to Citizens Advice.

With interest-only mortgages, monthly payments are lower than with traditional mortgages as the borrower only pays off the interest on the loan. Then the full debt is repaid at the end of the term, which is typically 25 years. It is expected that borrowers have a plan in place to do so.

However, new research from the charity estimates that 934,000 people with interest-only mortgages have made no arrangements to pay off the debt at the end of the term.

This number is significantly larger than the predictions made by the FCA in 2013, when it was predicted that of the 2.6 million interest-only loans due to mature by 2041, almost half of the borrowers would be unable to repay the debt.

The Citizens Advice research shows that the problem was misjudged and that is it much more of a serious issue. Its numbers show that 3.3 million people have interest-only mortgages. Of those, 1.7 million say they have no linked repayment vehicle, such as an endowment or a ISA, and 934,000 have no plan at all for repayment.

The research also found that over 430,000 of the borrowers had “not even given thought to how they will repay the capital”.

Gillian Guy, Chief Executive of Citizens Advice, said:

“People buy a home for stability – but interest-only mortgages have forced many into a financial black hole.

“Lenders have to exhaust all other options when borrowers get into arrears – it’s time to level the playing field so that interest-only customers get the same protections when their mortgages mature.

“It is also important that people can get independent advice, guidance and support about how they can plan and manage their finances.”

With 85,000 interest-only mortgages expiring every year, it is expected that the crisis will reach a peak in the next two years, with industry experts expecting a rise in repossessions.