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Repayment fear for three-quarters of interest-only borrowers

Samantha Partington
Written By:
Samantha Partington

Almost three-quarters of homeowners with interest-only mortgages are concerned they will not be able to repay their loan, according to a study.

Research by loan advisers Ocean Finance found 69 per cent of borrowers with interest-only mortgages don’t have a repayment policy in place. A fifth (22 per cent) believe they weren’t given adequate mortgage advice.

Taking out a mortgage on an interest-only basis means borrowers pay the interest on the loan during the life of the mortgage and then must repay the capital when the mortgage term ends. Just 31 per cent of those interest-only borrowers questioned in the survey said they have a separate investment policy in place, such as an endowment or an ISA, to repay the capital.

While 16 per cent said they plan to switch to a repayment mortgage before their current loan ends, 31 per cent said they expect to have to sell their home to settle the outstanding debt. And a fifth of homeowners said they don’t have a plan in place to repay the capital.

Ocean spokesperson Gareth Shilton said: “Interest-only has become a time bomb because so many people took out the products to cut the cost of their mortgage, with no view of how they would repay the capital element. Borrowers who have an interest-only mortgage with no repayment plan need to take action.

“It’s advisable to seek advice on whether they can overpay on their current interest-only deal, switch to a repayment mortgage, or use an ISA or pension to settle the capital payment.”

The research shows that just over a fifth of borrowers with interest-only mortgages don’t feel they were given adequate advice about repaying the capital portion of the loan when they took out their mortgage.

“While there is a place for interest-only mortgages, it is a specialised product that suits a small number of borrowers, rather than being the mass-market product it became in the 1990s. For example, if you have a large family home that you know you don’t plan to stay in once your children have moved away, then interest-only could make sense,” said Shilton.

“Interest-only mortgages are now typically only being approved for borrowers who can demonstrate they have a repayment vehicle or pension pot that is forecast to repay the capital element. Usually, borrowers also need to have a significant deposit that gives them a big equity gap.”