Author Topic: Interest-only mortgage time bomb  (Read 5990 times)

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Interest-only mortgage time bomb
« on: September 24, 2012, 11:06:22 am »
Interest-only mortgages the borrower only pays the interest due each month but pays nothing towards reducing the size of the overall loan so it never reduces.
This can mean monthly mortgage payments are up to 40% lower than a normal repayment loan.

This type of mortgage was popular in the 1980's and early 1990's where mortgages were provided in conjunction with endowment policies designed to repay the loan at the end of the term.
However, many of these borrowers are facing a shortfall as the endowments have under-performed or have lapsed.

There are around 1.3million interest-only mortgages where borrowers have no means of repaying the loan at the end of the term. 
Technically speaking this will mean they are in breach of their loan terms and could be at risk of having their homes repossessed.

It is believed that since 2002, and estimated 1.3 million home buyers have taken out interest only mortgages without any repayment mechanism in place, relying on ever increasing house prices.
In some cases, the lower repayments enabled buyers to take out even larger loans.

Around 80,000 interest-only mortgages reach maturity in 2012, with 170,000 becoming due to end each year by 2020.
More than half of borrowers that have no means of repaying their loan will be 60 or older.

There are four options available:
1. Start repaying the actual capital sum borrowed by switching to a repayment loan now.
2. Downsizing - Buying a cheaper property and using the difference in equity to replay the original home loan.
3. Arrange a new repayment loan with the lender. For most this will be the best solution.
4. Older borrowers may even consider an Equity Release scheme to clear the old loan.

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