A new research study published today by insurance, pensions and investment group LV= reveals a worrying mortgage gap’. Nearly half of the UK’s 2.9 million interest-only mortgages (45 per cent, 1.3 million mortgages) have no specified investment vehicle in place to pay off the capital on the loan.
Borrowers have not been obliged to have an investment plan linked to their interest only mortgage since the early 1990s, so perhaps unsurprisingly these kinds of loans have grown substantially in recent years.
The research shows that the vast majority of the £74 billion in loans that have no specified capital payment plan, were issued to borrowers in the last five years (89 per cent, £66 billion).
Four in 10 (41 per cent) of the interest only borrowers who have no capital payment plans – equivalent to around 530,000 people with £30 billion in loans – are relying on selling their home and using the proceeds to pay off their mortgage. However, with recent falls in property prices and further declines predicted, this strategy may be blocked for many people in the short to medium term.
Only one in five (21 per cent) plan to use other investments, not linked to their mortgage, to pay off the mortgage capital at the end of the term.
Mike Rogers, LV= group chief executive commented: “A previously booming property market led many people to bank on being able sell their home, use the proceeds to pay off the mortgage, and still have enough left to buy another home. However, this strategy may have been overturned by current and predicted future falls in property prices. These people should therefore seriously consider investing as much as they can now, and regularly, to help pay off the mortgage capital at the end of the term.”
Negative equity
13 per cent of respondents to the LV= study believe they are now in negative equity, while a further one in 10 (10 per cent) say they do not know whether their property is worth more or less than their outstanding mortgage.
The LV= research suggests that as many as 456,000 interest only borrowers could be in negative equity by the fourth quarter of 2009, with the worst affected being those who bought close to the peak of the housing boom in the second half of 2007. Four in ten of those in negative equity (41 per cent, 187,000) are relying on future house price increases to repay their loan.
With inflation at a 16 year high, unemployment rising at its fastest pace since the early 1990s and wage rises set to remain moderate, the financial pressures on interest-only mortgage holders are clearly on the up. Even for those people who have savings and investments already, recent market falls and weak global economic growth will mean lower investment returns over the short to medium term.
Mike Rogers concluded: “Providing for those things that matter most in life has undoubtedly got a lot harder in recent months and the current economic outlook will be making many families anxious. However, a little financial planning now could make a real difference down the line. We urge interest only borrowers with no firm capital payment plans to review their options, save as much as they can regularly, and seek professional advice early if needed.”
