Only one in three interest-only mortgagees has an investment plan that is on course.

By Tony Wornell

11 February, 2014

1.1 million interest-only mortgages appeared to be ticking time bombs according to Mortgage Achilles, BDRC’s annual study of the mind of the mortgage market, with holders either having no investment plan for capital repayment, or one that is not on track to clear their debt. The report concluded that over 200,000 home owners in the UK intended to sell off their homes at the end of their mortgage term.

The report questions home owners with interest-only mortgages on how they intend to pay them off at term end. For many, it appeared they had few options. Although 12% intended to sell their homes at term end, perhaps even more worrying were the 39% who currently had no investment plan to clear the debt and the quarter who did not know how they would repay the capital. Only a third reported they were on track with their plan to clear the debt.
It may not be too late to act, however. Many are fortunate to have a long period until term end, allowing them more time to create a proper plan for repayments. Over half of those with no investment plan have at least 15 years to go full term and will have an easier time deciding on appropriate action than the one in 14 who reach the end of their mortgage term in the next five years.

Given this current situation, lenders and the Financial Services Authority have severely tightened the availability of interest-only loans. The report suggests that the next step may be getting mortgagees engaged with the end game – what happens when their mortgage term finishes. Currently, too few have a credible repayment plan and will find themselves in deep water at term end. Perhaps lenders should be offering more assistance in plotting a course for repayment and reviewing it regularly if they are to make interest-only a viable mortgage scheme once again.

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