Interest-only mortgages worth £16 billion are due to mature this year, with over £50 billion worth of capital due to be paid off by 2020, new research shows.
An interest-only mortgage is when the monthly mortgage payment only covers the interest owed. Hundreds of thousands of borrowers who took out a loan now face having to pay it back.
They were once the norm in the UK and many were taken out with little thought to how they would be repaid.
Leeds Building Society conducted the research with the Centre for Economics & Business Research (Cebr) to better understand the existing scale of interest-only borrowing in the UK.
The research highlights how borrowers are addressing their interest-only mortgage, either through switching to a repayment mortgage or identifying an alternative strategy to pay off their mortgage ahead of its natural maturity date.
Leeds said that a greater choice of mortgage products and lenders proactively contacting borrowers to discuss repayment plans could have prompted borrowers to switch to a repayment mortgage or pay off their mortgage quicker.
Equally, the historic low interest rate environment could have helped some borrowers make their decision.
Richard Fearon, chief commercial officer of Leeds Building Society, said: “It is pleasing to see from our research that many borrowers are addressing their individual repayment strategies and that the interest-only back book is shrinking ahead of schedule.
“This is testament to the hard work of the lenders, regulators and the Council of Mortgage Lenders for raising awareness among borrowers of the need for them to consider how they will repay their loan at the end of the term.”
The Financial Conduct Authority has launched a review into how firms are treating borrowers whose interest-only mortgages are approaching maturity.
The FCA estimates that 600,000 interest-only borrowers will see their mortgages mature before 2020. Of these customers, just under half are expected to have a shortfall, with around a third of these shortfalls expected to be over £50,000.
Currently, the options open to people over 55 reaching the end of an interest-only mortgage with a shortfall are limited as they are often restricted by their age – too old for further borrowing, but too young for equity release.
Many of these people will either have to resort to selling, downsizing, or turning to savings or pension pots. This is despite the fact that many have good incomes and can continue to service a mortgage.
According to research by over-60s property experts Homewise, one in 10 over-55s UK homeowners are still paying interest-only mortgages and face the prospect of clearing their debt when the deal runs out.
While the majority are confident of clearing the debt, substantial numbers fear they will not be able to. The study shows 17% of interest-only borrowers aged 55-plus – equivalent to 24,300 – admit they will be unable to clear the debt.
The average amount owed by over-55s with interest-only mortgages is around £91,000, with one in seven owing more than £150,000.
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