Many of the 1.67 million homeowners with an interest-only mortgage could be at risk of losing their homes if they struggle to repay their balance at the end of their mortgage, the Financial Conduct Authority has warned.
The regulator says almost one in five homeowners have an interest-only or part-interest mortgage and is calling on them to speak to their mortgage provider as soon as possible about their repayment options.
With an interest-only mortgage, you only pay the interest during the mortgage term and then repay the full amount you borrowed when it matures.
If you've got an interest-only mortgage urgently check you will be able to pay the balance at the end of your mortgage, if you're worried you won't be able to see below for help on what you can do.
What does the FCA say?
Since the Financial Conduct Authority's (FCA) original warning on this in 2013, the number of interest-only mortgage holders fell from 2.6 million to 1.67 million - but these customers still account for almost 18% of all outstanding mortgages in the UK
Back in 2013 the FCA also identified three residential interest-only mortgage maturity peaks. The first is happening now and is affecting those nearer retirement, but these people have more modest shortfalls and higher levels of equity, making them lower risk, the FCA says.
The next two peaks are 2027/2028 and 2032, and the FCA says these people are most at risk of being unable to repay their mortgage as they are likely to be less well-off and have lower equity levels.
As part of its latest review into the issue the FCA looked at 10 lenders, which represent around 60% of the interest-only residential mortgage market, to see how they are helping customers to ensure their mortgages will be paid off.
It found lenders are trying to work with their customers on repayment strategies, but there were still improvements to be made including deciding when and how to contact customers, and making the processes easier, such as having shorter wait times to speak to an adviser.
Jonathan Davidson, executive director of supervision – retail and authorisations at the FCA, said: "We are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.
"We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons. We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take."
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I've got an interest-only mortgage - what can I do?
Here are things to consider and steps you can take to identify an interest-only shortfall, and address the problem:
- Establish your situation and consider whether you will really have the cash to pay off your mortgage.
- Save to plug the gap. The earlier you start, the better.
- If your lender allows, you could extend the term of your loan to give you more time to build up funds to pay off the debt.
- If you are on a relatively high rate mortgage, check if you can remortgage given rates remain quite low. You may not pay that much more on a repayment than on an interest-only if you move from a high rate to a cheaper one. See our Remortgage Guide and Cheap Mortgage Finding guide.
- If your after-tax rate on savings is lower than your mortgage rate, you may want to repay your mortgage with savings. Check for penalties for overpaying first.
- You could try to go part interest-only, part repayment, if you have the cash, so you're chipping away at more of the debt. Or you could switch to a repayment mortgage if you have plenty of spare funds each month.
- If you're at risk of losing your home now, two Government schemes could help: Support for Mortgage Interest, and, if you're facing repossession, the Mortgage Rescue scheme. Full details in the Mortgage Arrears Help guide.
- If your chosen plan is to sell your home, even if the value is larger than the mortgage, you need some legroom in case the value drops.
- If you plan to sell, where will you live? Make sure you consider that. If you downsize your home, will it be big enough?
- If you have an endowment, sadly, mis-selling cases are, by and large, no longer possible because the time limit has passed. So plan now. If you need general money or debt advice, try the Money Advice Service (you can try 0800 138 7777) or Citizens Advice.
- If you need help switching mortgage, try an independent mortgage broker. Again, see our Remortgage Guide and Cheap Mortgage Finding guides.
No evidence of mis-selling
The FCA confirmed in its 2013 research that it had not found any evidence of widespread mis-selling of interest-only mortgages.