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Report shows extent of interest-only time bomb

Nearly two-fifths – 39 per cent – of interest-only mortgage holders have no plan in place to clear the debt, according to market research consultancy BDRC Continental.

The Mortgage Achilles report estimates are around 1.8 million interest-only mortgages outstanding in total, with around 700,000 of these having no plan in place to repay the capital at the end of the term. Interest-only loans account for around 19 per cent of all outstanding home purchase mortgages.

Among those with no repayment plan, 23 per cent expect to switch to a repayment mortgage while 16 per cent are relying on either selling the property or using cash savings. Around 26 per cent say they do not know how they will repay the capital.

Around 22 per cent, or 400,000 borrowers accounting for £45bn in mortgage debt, have a plan but not one which is expected to clear the debt.

Only 560,000 out of the 1.8 million have an investment plan in place which is on course to clear the debt.

Around 12 per cent of borrowers on an interest-only mortgage – 216,000 mortgages – say they intend to repay the capital by selling their home at the end of their mortgage term.

BDRC Continental director Tony Wornell says: “Everyone with an interest-only mortgage needs a credible repayment plan. Changing to a repayment mortgage is the most certain solution but if that is not possible, borrowers could consider overpaying the mortgage or building up cash savings if they do not like the idea of an investment plan.”

The FSA is aiming to publish a thematic review later this year on the issues faced by existing interest-only borrowers unable to repay the remaining capital at the end of the mortgage term.

Trinity Financial product and communications manager Aaron Strutt says: “If borrowers’ terms are coming to an end, the lenders are unlikely to extend it, particularly if they are of a certain age. Borrowers need to start planning out their finances before they come under too much pressure to sell the property at the end of the term.

“Borrowers need to assess their finances and work out how much it is going to cost them to swap on to capital repayment or look to sell any other investments they have got.”

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