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Interest-only mortgage shortfalls to hit 300,000

10% of borrowers have no repayment plan

A mortgage deed being signed

Just under half of all interest-only mortgages due to mature before 2020 are expected to have a shortfall, meaning that thousands of people will not have enough to pay off their home loans, a report from Financial Conduct Authority (FCA) has found.

The regulator’s review of interest-only mortgages in the UK found that around 2.6m interest-only mortgages are due for repayment over the next 30 years – and out of these about 10% of borrowers have no repayment strategy in place. Some 600,000 will mature in the next seven years, with half of those facing a shortfall. 

Some 13% of interest only mortgage borrowers said they were unaware they needed a repayment plan in place to cover the amount borrowed loan that was separate to the interest payments

The average shortfall borrowers expect to have is £22,100. However, estimates for the regulator suggest that around half these shortfalls will be more than £50,000.

Interest-only lenders need to contact borrowers

The regulator wants lenders to engage with borrowers to ensure they have appropriate arrangements in place to ensure they will be able to repay their loans in full. The FCA has provided guidance for lenders on how to deal with customers experiencing repayment difficulties. 

If they haven’t done so already lenders will be expected to contact all interest-only mortgage customers to discuss what plans they have in place, with the initial focus on customers with loans maturing before 2020.

Mis-sold your mortgage? – find out what you can do in our consumer rights guide

Act now to repay your mortgage

The most common repayment strategies borrowers have in place for interest-only mortgages are savings and investments. Other plans include downsizing, selling another property, selling a business or using an inheritance windfall.

FCA chief executive Martin Wheatley said: ‘By acting now we are aiming to nip this problem in the bud. Mortgage lenders have volunteered to contact their most at-risk customers with a ‘wake-up call’ to highlight the report’s findings and what they need to do without delay.’

Lenders should recognise their responsibility, says Which?

Which? executive director Richard Lloyd said: ‘It’s alarming that nearly half of those with interest-only mortgages set to mature before 2020 are likely to have a shortfall, with a third of these shortfalls expected to be over £50,000.  

‘With nearly half of people worried about mortgage rates and a third expecting their finances to get worse in the next year, it’s right that the Financial Conduct Authority ensures every lender proactively deals with this before it escalates into a bigger problem.

‘Lenders should recognise their responsibility, communicate clearly with their customers and explain all the options available to help them. It’s essential that customers trapped on their current mortgage are treated fairly, and lenders must show forbearance to people who are struggling financially.

‘We urge anyone who is facing a shortfall to speak to their lender in the first instance. People should seek free debt advice if they are struggling, or speak to an independent mortgage adviser to help them switch to another mortgage deal.’

More on this…

  • Interest-only mortgage repayment shortfalls – what to do if you may have problems repaying your mortgage
  • How to avoid repossession – what steps to take to avoid repossession
  • How to remortgage – how to switch to different mortgage
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