More than a quarter of interest-only mortgage borrowers in the UK may struggle to repay their home loans, new research shows.
Interest-only mortgages often appeal because the monthly repayments are far less than with a full capital and interest arrangement, but the study by the Economics and Business Research (Cebr), conducted on behalf of financial service provider, OneFamily, found that many borrowers simply do not have a repayment strategy in place.
The findings from the analysis of the market for residential interest-only mortgages and people’s repayment plans adds to growing evidence that interest-only mortgage holders face a ticking-time-bomb with the expected average unsettled debt estimated to be £21,000.
The study found that 18% of mortgage holders admit that they do not understand their loan, while 23% do not know what interest rate they are paying.
Most worrying is that 10% of interest-only mortgage holders say they have no plan in place to pay off their mortgage, and no idea how they will do so when the debt is due.
Simon Markey, CEO of OneFamily, said: “Our research adds to a disturbing picture facing thousands of homeowners who do not yet know how they are going to meet their mortgage obligations. With many just not sure what to do, it’s vital they seek advice on all the options including new Lifetime Mortgages which can help them pay off their interest-only mortgage, release capital for other adventures, and stay in the home they love.”
The Cebr study also found that those who do have plans for repaying their interest-only mortgage may find they need to rethink their strategy. Methods to pay off interest-only mortgages include:
+ Downsizing: One in four (24%) mortgage holders plan to sell and move somewhere else to pay off their initial loan. However, a fall in house prices could leave homeowners in negative equity making the option impossible.
+ Overpayments: One in four (24%) mortgage holders plan to pay off the loan over time by making overpayments, but evidence shows that many fail to do so leaving them with an unmet debt at the end of the mortgage period.
+ Endowments: One in five (19%) mortgage holders plan to use cash from endowment policies. While endowment policies used to be the most popular repayment vehicle it has long been clear that they do not always deliver the expected returns, leaving homeowners short of the funds they need.