Interest-only mortgages are disappearing - but is the worst yet to come?
The number of outstanding interest-only mortgage loans has fallen by more than a quarter over the past two years, as lenders tighten their requirement for borrowers to have a repayment plan in place.
According to the Council of Mortgage Lenders (CML), the number of active interest-only mortgages has declined by 16% in the past year alone, with 1.9 million now in place.
Citizens Advice recently warned that almost a million people could have their homes repossessed when their interest-only mortgages mature and they find themselves unable to repay the capital.
Startlingly, 430,000 may not have even considered how they will repay the capital when it comes due. Citizens Advice looks at the number of individual mortgage-holders, while the CML's figures represent the number of mortgages on the market - many of which will be jointly held.
The CML claims there are currently only about 16,000 outstanding loans that have matured but not yet been repaid or restructured, and maintains that these loans are usually repaid in a few months after coming due.
But the Financial Conduct Authority (FCA) has warned we could see three waves of defaults in the near future, given the historic sales of interest-only mortgages - the first in 2017/18, the second in 2027/28 and the third in 2032.
Despite the warnings from Citizens Advice and the FCA, Paul Smee, director general of the CML, was optimistic.
"The continued decline of interest-only mortgages outstanding confirms our perception that many borrowers are firmly on top of this issue, and successfully making plans to manage their loans to ensure they are not faced with a repayment shortfall at maturity," he says.
Our sister website Money Observer recently reported that more people are turning to equity release - whereby you sell part of a property for cash - to fund their retirements, and that this could partly be due to people coming to the end of their interest-only mortgages and having to find a way to repay the capital.
A loan in which the borrower pays only the interest on the sum borrowed for the life of the mortgage but, at the end of the mortgage term, they still owe what they originally borrowed as this remains unchanged. The advantage of an interest-only mortgage is the monthly repayment is considerably lower than for a comparable repayment mortgage. Lenders generally insist the borrower also invests in an endowment, ISA or pension savings policy that, on maturity, is intended to pay off the capital loan.
A term to describe financial products or ‘plans’ that help older homeowners turn some of the value (equity) of their homes into cash – a lump sum, regular extra income, or sometimes both – and still live in the home. There are two main types of equity release: lifetime mortgages and home reversion plans (see separate entries for both). Whichever type you choose, you borrow money against the value of your property, on which interest is charged, and the loan is repaid when the house is sold after your death.