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| City regulator warns homeowners over interest-only mortgages | City regulator warns homeowners over interest-only mortgages |
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| Almost half of all people with "interest-only" mortgages – about 1.3 million homeowners – may not have enough money to pay off their home loan when it matures and face an average shortfall of more than £71,000, according to new research by the main City regulator. | Almost half of all people with "interest-only" mortgages – about 1.3 million homeowners – may not have enough money to pay off their home loan when it matures and face an average shortfall of more than £71,000, according to new research by the main City regulator. |
| The stark figures will fuel fears that some of those left with a huge bill could end up being repossessed or having to keep making monthly mortgage payments into their old age. | The stark figures will fuel fears that some of those left with a huge bill could end up being repossessed or having to keep making monthly mortgage payments into their old age. |
| The Financial Conduct Authority (FCA) – whose boss has previously labelled interest-only mortgages a "ticking timebomb" – said borrowers, lenders and regulators needed to take action "before it is too late". | The Financial Conduct Authority (FCA) – whose boss has previously labelled interest-only mortgages a "ticking timebomb" – said borrowers, lenders and regulators needed to take action "before it is too late". |
| This is the latest in a line of warnings about interest-only mortgages, which have helped millions of people on to the housing ladder during the past two decades but have recently become the subject of a regulatory clampdown. | This is the latest in a line of warnings about interest-only mortgages, which have helped millions of people on to the housing ladder during the past two decades but have recently become the subject of a regulatory clampdown. |
| With this type of home loan, the borrower agrees to pay off the interest each month but makes no capital repayments. Borrowers are expected to make sure they have an investment plan in place – traditionally an endowment policy – to pay off the debt at the end of the term. However, not everyone does, and the FCA's predecessor, the Financial Services Authority, became increasingly concerned that some homebuyers could be storing up problems for the future because they had little or no idea of how they would pay back the loan. Some mortgage lenders have now stopped offering this type of deal. | With this type of home loan, the borrower agrees to pay off the interest each month but makes no capital repayments. Borrowers are expected to make sure they have an investment plan in place – traditionally an endowment policy – to pay off the debt at the end of the term. However, not everyone does, and the FCA's predecessor, the Financial Services Authority, became increasingly concerned that some homebuyers could be storing up problems for the future because they had little or no idea of how they would pay back the loan. Some mortgage lenders have now stopped offering this type of deal. |
| The FCA carried out a detailed review and found that up to 2.6m interest-only mortgages will mature between now and 2041, with about 600,000 due for repayment by 2020. The regulator found that 90% of all interest-only borrowers said they had a repayment strategy in place to repay what they owed, though that still leaves 260,000 people who do not. | The FCA carried out a detailed review and found that up to 2.6m interest-only mortgages will mature between now and 2041, with about 600,000 due for repayment by 2020. The regulator found that 90% of all interest-only borrowers said they had a repayment strategy in place to repay what they owed, though that still leaves 260,000 people who do not. |
| More worryingly, it found some people were "underestimating the problem": 37% of those quizzed reported a definite or possible shortfall between what they will have to pay the lender when their mortgage term ends, and what their savings, investments or other strategy will deliver. And borrowers who were able to give a figure believed their shortfall would be, on average, £22,000. But when financial modelling was carried out, the proportion who may not have enough money to pay off the loan jumped to 48%, and the average shortfall was "considerably higher", at £71,850. That sum is approaching half the average £162,000 house price in England and Wales. | More worryingly, it found some people were "underestimating the problem": 37% of those quizzed reported a definite or possible shortfall between what they will have to pay the lender when their mortgage term ends, and what their savings, investments or other strategy will deliver. And borrowers who were able to give a figure believed their shortfall would be, on average, £22,000. But when financial modelling was carried out, the proportion who may not have enough money to pay off the loan jumped to 48%, and the average shortfall was "considerably higher", at £71,850. That sum is approaching half the average £162,000 house price in England and Wales. |
| The research uncovered three "peak periods" when interest-only mortgages (buy-to-let loans were excluded from the study) will mature: 2017-18, 2027-28, and the biggest spike year of all, 2032, when about 190,000 loans, mainly taken out in the 2005-08 boom years are due for repayment. The FCA said this latter group included "concentrations of highly indebted individuals with low or negative equity", but added that at least these people had the benefit of time on their side. | The research uncovered three "peak periods" when interest-only mortgages (buy-to-let loans were excluded from the study) will mature: 2017-18, 2027-28, and the biggest spike year of all, 2032, when about 190,000 loans, mainly taken out in the 2005-08 boom years are due for repayment. The FCA said this latter group included "concentrations of highly indebted individuals with low or negative equity", but added that at least these people had the benefit of time on their side. |
| The FCA report named the biggest providers of interest-only loans as Santander, Halifax and Nationwide, and indicated that in cases where people were unable to repay their debt, banks were often extending the mortgage term at the same time as switching the loan over to a repayment basis – suggesting that many people could end up having to keep making payments for years. Ratings agency Moody's has claimed that in some extreme cases, borrowers could service these loans "until their death". The FCA said repossession should be "a last resort" only after all available options had been considered. | The FCA report named the biggest providers of interest-only loans as Santander, Halifax and Nationwide, and indicated that in cases where people were unable to repay their debt, banks were often extending the mortgage term at the same time as switching the loan over to a repayment basis – suggesting that many people could end up having to keep making payments for years. Ratings agency Moody's has claimed that in some extreme cases, borrowers could service these loans "until their death". The FCA said repossession should be "a last resort" only after all available options had been considered. |
| Martin Wheatley, the FCA chief executive, said: "Mortgage lenders have volunteered to contact their most at-risk customers with a 'wake-up call'… My advice to borrowers is to not bury your head in the sand – take action now." Despite the warning, the FCA said interest-only loans remained "right for certain people". | Martin Wheatley, the FCA chief executive, said: "Mortgage lenders have volunteered to contact their most at-risk customers with a 'wake-up call'… My advice to borrowers is to not bury your head in the sand – take action now." Despite the warning, the FCA said interest-only loans remained "right for certain people". |
| The Council of Mortgage Lenders said its members would be stepping up their communications to borrowers, and anyone with a mortgage maturing before the end of 2020 could expect to be contacted in the next 12 months and asked about their repayment plans. | The Council of Mortgage Lenders said its members would be stepping up their communications to borrowers, and anyone with a mortgage maturing before the end of 2020 could expect to be contacted in the next 12 months and asked about their repayment plans. |
| Top mortgages | Top mortgages |
| Chelsea Building Society | Chelsea Building Society |
| Chelsea Building Society | |
| Yorkshire BS | Yorkshire BS |
| Provided by London & Country for the Guardian | Provided by London & Country for the Guardian |