Almost one million homeowners cannot repay their mortgages after opting for interest-only loans, warns Citizens Advice.
The new figure is much higher than previous estimations from lenders and the City watchdog, the Financial Conduct Authority (FCA).
Citizens Advice believes 934,000 homeowners do not have a plan for how they will pay back the loans at the end of their mortgage term. It cautions that time is running out for some people to organise their finances.
Some may be forced to sell their homes or even have their properties repossessed if they cannot find the funds, the charity says.
Millions of buyers were sold interest-only mortgages before rules were tightened three years ago.
Without the need to pay back some of the loan each month on top of interest, buyers could borrow more to purchase their dream homes.
Sarah and her husband live near Brighton, where their home was bought with an interest-only mortgage. She says that the couple could barely afford the interest when they purchased the house and often fell into arrears.
Almost 1m Face Mortgage Repayment Difficulties
“We were silly,” she says. “We’d just had our first baby.”
She adds: “But they shouldn’t have given the loan. We didn’t understand what we were taking on and didn’t think about having to pay it back.”1
The couple has 16 years before they have to repay almost £200,000, but the debt is already a constant worry to them.
Citizens Advice estimates that out of the 934,000 who do not have a plan in place to repay the loans, over 432,000 have not even considered the issue.
Chief Executive of the charity, Gillian Guy, says: “People buy a home for stability, but interest-only mortgages have forced many into a financial black hole.”1
Two years ago, the FCA calculated that a much smaller number, around 260,000, did not have a strategy to pay off their mortgages.
But the huge difference could be due to various estimates over the amount of interest-only loans.
The FCA claimed it was 2.6m, but the Council of Mortgage Lenders (CML) states that this has dropped recently to 2.4m.
Citizens Advice calculated a total of 3.3m interest-only mortgages, taking into account that many couples have joint loans.
It argues that its surveying shows the large number of homeowners who cannot deal with the debt.
The first surge in repayment problems is expected in 2017-18, when endowment mortgages sold in the 1990s hit their peak period of maturing.
Ten years later, in 2027-28, the amount of interest-only mortgages sold in the early 2000s coming to an end will soar.
The final high will arrive in 2032, when the lending to buyers who could barely afford the interest, just before the recession, must be dealt with.
Regulators have advised banks and building societies to write to their customers, warning them about the financial crises they could find themselves in.
Some lenders have converted interest-only loans into lifetime mortgages, which allow the borrower to stay in their home throughout retirement, paying interest if they can. The debt is paid off when they die or have to move out.
However, Citizens Advice wants mortgage providers to do more, including phoning people and providing face-to-face meetings, to prepare them for when they must repay their loans.
It would also like to see greater protection for interest-only borrowers, calling for lenders to consider a range of alternatives before repossessing a home.
The CML, representing mortgage providers, states: “Lenders will continue to communicate directly with customers in a variety of ways and to raise consumer awareness.
“Borrowers should not ignore attempts to communicate with them. The lender is trying to help and reduce the risk of shocks at the end of the mortgage term.”1
An FCA spokesperson says: “We expect firms dealing with interest-only borrowers to discuss repayment strategies and propose solutions where there are no plans in place.
“While we have seen many firms progress with this, borrowers must also engage with their lenders now to resolve it, we will also continue to monitor lenders as part of our normal supervisory work.”1