Interest only mortgage loans in UK could be facing multi billion pound shortfall
Home owners in the UK are facing a £6.1 billion mortgage repayment shortfall in the next decade with 27% of those with interest only loans not able to pay it back, new research suggests.
More than a million interest-only mortgages will mature over the next 10 years but more than a quarter of households won’t be able to pay back their loan, with the average shortfall estimated to be £21,000, according to new research commissioned by financial mutual OneFamily and authored by the Centre for Economics and Business Research (Cebr).
With millions of Britons sold interest only mortgages in the 1980s, 1990s and early 2000s, a £6.1 billion cumulative shortfall is projected over the next 10 years at a time when repayment strategies such as downsizing, overpayments and endowments have all been impacted by macro factors, such as the economic downturn.
The study found that 18% mortgage holders admit that they do not understand their loan, while 23% do not know what interest rate they are paying while one in 10 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.
‘Our research adds to a disturbing picture facing thousands of home owners who do not yet know how they are going to meet their mortgage obligations,’ said Simon Markey, chief executive officer of OneFamily.
‘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,’ he added.
The study also found that those who do have plans for repaying their interest only mortgage may find they need to rethink their strategy in light of current economic conditions.
Some 24% of mortgage holders plan to sell and move somewhere smaller to pay off their initial loan. However, the study suggests that any fall in house prices could leave home owners in negative equity making the option impossible.
Some 24% also 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.
Then 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 home owners short of the funds they need.