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One in three interest-only mortgages are a ‘ticking time bomb’

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11/02/2013
Over a million interest-only mortgage holders either have no investment plan to repay their mortgage, or are on plans that are not on track to clear their debt.

The report from Mortgage Achilles, BDRC Continental’s annual study of the “mind of the mortgage market”, looks at the “ticking time bomb” issue from the standpoint of interest-only mortgage holders.

It questions how people who have these mortgages intend to pay them off at the term end.

The report estimates 1.8m homes in the UK are on an interest-only mortgage, around19% of all home purchase mortgages in the UK.

And 12% of those with an interest-only mortgage say they intend to repay the capital by selling their home at the end of their mortgage term – that represents 216,000 home owners.

Tony Wornell, director at BDRC Continental, said: “Our research suggests that some interest-only borrowers are not engaged with the end game – what will happen when their mortgage term finishes and they have to repay the capital.

“Everyone with an interest-only mortgage needs a credible repayment plan. Changing to a repayment mortgage is the most certain solution but if that is not possible, borrowers could consider overpaying the mortgage or building up cash savings if they do not like the idea of an investment plan.

“Some borrowers are using a mix of methods to ensure they can clear the capital. Whatever the plan, regular review is important in staying on course. It could help if lenders got involved in this review and feedback process rather than leaving it entirely to the borrower.”

BDRC says that there is still time to seek advice and make proper arrangements for clearing the debt if you have 15 years left to repay the capital in full.

Lenders and the Financial Services Authority have tightened the availability of interest-only loans in recent months, and BDRC says that their next step may be to help people identify the best way to pay off their commitment.

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