Interest-only mortgages were referred to as a “ticking time bomb” in 2012 by the Financial Conduct Authority (FCA), due to a fear that a proportion of borrowers didn’t really understand their commitment to pay back the loan in full at the end of the term.
Subsequently, regulators continue to restrict the offer of these types of loan and 300,000 more interest-only mortgages were slashed last year. Now just 1 percent of loans arranged are interest-only. Do you have an interest-only mortgage?
Borrowers with a plan
Interest-only mortgages were popular in the 80’s and 90’s to get onto the property ladder with affordable monthly payments. Lenders only charge the borrower the interest part of the loan each month, the capital part becomes due only at the end of the mortgage.
It suited sales professionals who earned commissions and could pay off large sums quarterly or annually, reducing the capital.
It also suited property investors, who could pay low instalments whilst property renovations took place or whilst the equity grew, and a sale would take care of repaying the capital.
These borrowers though used the interest-only mortgage to their advantage, but had a plan.
Borrowers without a plan
Banks are in the process of contacting all borrowers with an interest-only mortgage arrangement to find out what their plan for repayment is.
The banks aim is to convert as many as possible onto an alternative product to save drastic measures, like repossession, if the final capital sum is not met.
By May 2014, the banks had contacted all borrowers with an interest-only loan due to expire by 2020, and more since. However, only 10 percent responded.
Dental & Medical Financial Services are specialist mortgage advisers to the dental and medical profession. If you have an interest-only mortgage and need to discuss your plan to repay the capital, please contact the team and we can look at your options together.
Tel: 01403 780 770