FCA issues warning on interest-only mortgages
Published on 02 May 2013 10:30 AM
Over a million people with interest-only mortgages risk losing their home when it comes to paying them off, the Financial Conduct Authority (FCA) has warned.
Some 2.6 million UK householders hold interest-only mortgages, but according to Financial Conduct Authority estimates nearly half of these borrowers would not have savings or other funds to cover the final bill.
The average shortfall is £71,000, according to FCA research.
The rise of interest-only mortgages
Interest-only mortgages became popular in the 1990s, when sold alongside an endowment policy, and then again over the last 10 years when many borrowers banked on the rising value of their home to cover the final cost of repaying their debt.
Now, about a third of all UK mortgage holders have an interest-only mortgage with which their monthly payments only cover the interest on the amount borrowed. The total debt still needs to be paid back when the mortgage term matures - usually after 25 years - and if borrowers are unable to do this by other means, lenders may force the sale of the property to cover this cost.
Older people at risk
There are currently a large number of older people with interest-only mortgages.
Each year between 2017 and 2032, 40,000 house-holds aged 65 and over will have interest-only mortgages which are due to mature. In addition, 25,000 households aged between 50-64 will see their interest only mortgages mature, rising to 130,000 households in 2032.
FCA modelling suggests that nearly half of all interest-only loans are unlikely to be paid back in full. Of those, half will still owe £50,000 - a significant amount of money for many people to find from existing savings, which might have been ear-marked for retirement.
While some may be able to extend their mortgage, this is likely to be difficult for those who are already retired, because even if they could afford it many banks and building societies impose arbitrary age limits on mortgage lending.
'No room for complacency' - Age UK
As the FCA's review shows that 1 in 10 borrowers have no repayment strategy, Age UK thinks there is no room for complacency, especially since the current low interest rate environment will not continue indefinitely. Age UK is calling for lenders to work with older mortgage borrowers to find affordable and realistic solutions.
Michelle Mitchell, Age UK's Charity Director General said, 'With 1 in 10 borrowers having no plan as to how they are going to pay off their loan - there is simply no room for complacency for lenders or older consumers. We call on banks and building societies to lift their arbitrary age limits on loans which unjustifiably prevent many older people who could afford a mortgage from extending the term of their loan.
'Decisions on lending should be based on whether an individual is able to repay a loan not on an outdated vision of what it means to be older. It is also important to have access to targeted, independent advice for those older people who are experiencing difficulties.'