Interest Only Mortgages Time-Bomb

Borrowers who took out interest-only mortgages over the past two decades have been bombarded with headlines in recent months about the time-bomb emerging as a result of people being unable to repay their home loan.

According to the Financial Conduct Authority, by 2020, 6 million interest only mortgages will be due for repayment. It is thought that 10 per cent of these have no repayment strategy. If you have an interest-only mortgage, you have only been paying the interest on the loan, rather than the debt back. For example, if you have a £80,000 interest-only mortgage for 25 years, at the end of all those years of payments you will still need to find £80,000 to pay off the capital.

WAKE-UP CALL: According to the FCA, by 2020, 6m interest-only mortgages will be due for repayments.

WHAT DOES THE REGULATOR SAY?

The Financial Conduct Authority claims that there will be three peaks in the interest only mortgage market, one in 2017/2018 when endowment mortgages sold in the 1990's and linked to these products expire.

In 2027/2028 there will be another peak when those interest only mortgages typically sold from 2003 to 2009 mature, according to the financial regulator. The third peak has been estimated as 2032 from mortgages sold at high loan to values between 2005 and 2008.

According to the FCA, the average outstanding balance of an interest-only mortgage customer is £55,000.Your bank or building society manager will want this money back once the loan comes to an end. But there is no need to panic. The key is to be prepared.

Types of repayment vehicle for an interest-only mortgage

You must be able to show the lender how you can repay the mortgage at the end of the term. You can’t rely on the promise of a future windfall such as an inheritance or bonus. You also can’t speculate that property prices will increase in value enough to allow you to buy a smaller home and still pay off the mortgage.

It is you and not the lender who is responsible for putting in place and maintaining a credible repayment plan to repay the original loan. Even so, the lender will check at least once during your mortgage term, that your repayment plan is on track to cover your mortgage.

Examples of repayment vehicles include:

• Cash saved in a savings account or ISA (although some lenders are no longer accepting this as a repayment vehicle)
• Stocks and shares ISAs
• Pensions
• Investment bonds
• Shares
• Unit trusts
• Regular savings plans (endowment policies), and
• Other properties or assets

Sankofa's innovative Sankash+ plan combine’s income, expenditure, savings and investments into one equity plan that can be use as a repayment vehicles to assist in pay off a mortgage or plans for the future.