1.3MILLION with interest-only loans face losing their homes in mortgage 'timebomb'

May have to borrow money from family or friends to make up shortfall

Others face extending their mortgages well into their 70s

Financial Conduct Authority says mortgage 'timebomb' will hit 40,000 people a year between 2017 and 2032

Around 1.3million families face losing their homes after taking out mortgages which they have little or no hope of repaying, a major report reveals today.
Many householders on ‘interest-only’ deals have failed to make provision for paying back the capital, the Financial Conduct Authority concludes.
When their mortgages expire, they could be forced to sell their family homes or borrow money from friends or family to make up the shortfall. Others face extending their mortgages well into their 70s.

Homeowners with an interest-only mortgage could be forced to sell their property or borrow money to pay back the capital

Asked how they planned to repay the capital, some admitted their only hope was that they will have died before their bank asks for its money back.
The FCA believes the mortgage timebomb will hit 40,000 people a year between 2017 and 2032, many of whom will be over the age of 65 when their loan matures.
It said its report was a ‘wake-up call’ for the 2.6million householders with interest-only mortgages, which allow them to pay off only the interest. At the end of the term, they are supposed to have amassed enough in savings or equity to pay off the capital.

 

However, the FCA found that the average amount owed on interest-only loans is £72,000, with many owing more than double that.
The FCA report warns that a shocking 48 per cent of such borrowers either have no way of repaying the loan, or will fall woefully short of the amount they need.
Around 260,000 have no strategy at all for repaying the debt. Many said they planned to ‘downsize’ to a smaller home, while others were pinning their hopes on inheriting a lump sum from a relative.

'SCARED OF A NEW LOAN'

Heartbreak: Colin and Mandy Mee have an interest-only mortgage and are worried they will be forced to sell their home in Darlington

Colin and Mandy Mee have no idea how they will pay off their £119,000 mortgage in 2028.

Mr Mee took out the interest-only loan on a three-bedroom semi-detached home in Darlington in 2005. He was attracted by the £466-a-month payments with a 4.7 per cent interest rate.

The couple planned to switch to a repayment loan but Mr Mee was made redundant last year.

The couple now play in a Fifties-style wedding band called the Mee Kats, with 50-year-old Mrs Mee on the double-bass. A repayment mortgage would raise their monthly payments to £675, which they could no longer afford.

Their house is now worth £150,000 and they are considering selling it before the capital is due.

Mr Mee said: ‘I keep saying to Mandy that when we need to retire we are going to be forced to sell up if we haven’t paid off the mortgage by then. That would be heart-breaking because I love everything about this place. In a worst-case scenario, we can take the equity and rent.

‘What would really scare me is if our bank tried to push us back on to a repayment loan tomorrow because there is absolutely no way we could afford it.’

In addition, many borrowers are already in dire financial straits, with one in ten having ‘in excess of £25,000 of unsecured borrowing’, including credit card bills, overdrafts and payday loans.
The report said 65,000 householders believe they were mis-sold the mortgages and claim they had no idea they would be expected to repay the original loan.
Over the next 12 months, homeowners whose loans are due to mature within the next seven years are to be sent a formal letter to warn them about the problem.
Interest-only mortgages were sold by many banks and building societies until 2009, with some people allowed to borrow more than seven times their salary.

Interest-only mortgages have almost disappeared from the mortgage market, with lenders such as Nationwide refusing to sell them to new customers

The FCA made it clear that borrowers – not their banks – must take responsibility for the loans that they took out. Martin Wheatley, chief executive, said: ‘My advice to borrowers is to not bury your head in the sand. Take action now.’
The Council of Mortgage Lenders echoed the FCA, saying: ‘The responsibility for repaying the mortgage lies with the customer.’
Richard Lloyd, executive director of consumer watchdog Which?, said: ‘Lenders should recognise their responsibility, communicate clearly with their customers and explain all the options available to help them. It is essential that customers trapped on their current mortgage are treated fairly, and lenders must show forbearance to people who are struggling.’
Mark Harris, chief executive of mortgage broker SPF Private Clients, said interest-only mortgages had helped many people to buy their first home, but added: ‘It is not suitable for everyone. In retrospect, perhaps at the height of the market, interest-only mortgages were dished out rather too freely.’
Interest-only mortgages have almost disappeared from the mortgage market, with lenders such as Nationwide and the Co-op refusing to sell them to new customers.

THE INTEREST-ONLY TRAP FOR BRIGHT YOUNG THINGS

By Simon Lambert, of  Mail Online's This is Money

The report suggests bright young things are trapped by big mortgages, says Simon Lambert

The interest-only timebomb ticking away for borrowers has been laid bare again.

We have long warned about this issue and have even built our own wake-up alarm calculator (below) to help people understand it.
It's important to note that not all interest-only mortgages are bad. Used sensibly they can be an efficient and flexible way to borrow.
But the new Financial Conduct Authority report identifies in its great detail a band of borrowers we have warned about – dubbed the Bright Futures.
These are young professionals with good career prospects who borrowed big to get on the property ladder in the late boom years. There is a disproportionate number of them in London and the South, where house prices are highest - many of them also carry large amounts of personal unsecured debt on credit cards and loans.
A shift to a repayment loan would mean severe cutbacks to their spending - and hamper their chance of saving, especially for retirement.
As someone in my mid-30s, I know plenty of them - they are my peers in good jobs who cannot really afford their sizeable mortgages. They bought properties before the 2007 peak and were encouraged by lenders and brokers to go for broke.
In fact, when my wife and I bought our first flat in 2006 we were openly invited to borrow more and buy a more expensive home by going interest-only. We turned that offer down, but many didn't.
The FCA report quite rightly identifies that this chunk of borrowers have the time and the earnings potential to switch to a repayment mortgage and get the debt cleared.
The only problem is that while that may be true over the next two decades or so, it doesn't mean they can afford to stump up the extra £500 a month they may need know to switch to a repayment loan now.
And with lenders having called time on interest-only loans that means they can't move or remortgage, putting their own crunch moment a lot closer than they think.