INTEREST-only mortgages are a “ticking time bomb” for hundreds of thousands of homeowners in the UK who may have no way of paying off the money they owe, experts have warned.
Borrowers on this type of loans are allowed to only pay the interest on their mortgage each month, meaning the real amount owed stays the same.
As these payments are typically lower than on other types of mortgages, it allows buyers to borrow more money from elsewhere to buy their dream home.
The Council of Mortgage Lenders (CML) now estimates that around 1.9 million borrowers – about 21 per cent of all homeowner mortgages – are just paying off the interest on their debts without making a dent in the capital.
It is believed that one in 10 households do not have an appropriate strategy to repay them once the loan expires.
It means they face having to sell their home or have it repossessed if funding is not available.
Despite the figures, the CML stressed that the number of people on interest-only mortgages continues to shrink.
“The interest-only loan book was 3.2 million in 2012, it has now fallen to 1.9 million. We have seen four years of fairly steady decline, at a rate of between 10 and 13 per cent a year,” a spokesperson for UK finance, formerly known as the CML said.
“While there may be some individual borrowers who would reach mortgage maturity without a robust repayment plan, this was not the case for most – the progress made on interest-only has been encouraging,” he added.
But Adrian Anderson, mortgage broker at Anderson Harris, said the 1.9 million borrowers on interest-only home loans a “time-bomb”.
He said: “We have definitely got an interest-only mortgage ticking time bomb scenario.”
“Lots of people in the past took out interest-only mortgage at much higher loan-to-value ratios than would now be granted, and people took them out without thinking about how they would pay them off.”
He added that borrowers without a repayment strategy should start thinking about how they can pay their mortgages and seek independent advice.
“Most lenders will allow a borrower to overpay on their mortgage by up to 10 per cent of the mortgage amount per annum so you could set up a direct debit to overpay every month if you can afford to do so,” he said.
“Another option may be extending the term, giving you more time to pay back the mortgage. Speak to your lender to see whether this is possible if you feel you can still afford the monthly payments into retirement,” he added.
The Financial Conduct Authority (FCA), UK’s financial watchdog, said that due to previous peaks in the sale of interest-only mortgages, they expect there to be waves of potential repossessions in 2017-2018, 2027-2028 and in 2032.