Almost a million 'facing mortgage black hole'
ALMOST a million people face losing their homes because they chose interest-only mortgages in the past, according to Citizens Advice.
The charity say that 934,000 people "do not have a plan" on how to pay back their loans at the end of the mortgage term.
Those that can't meet their mortgage obligations may have to sell their property or have their homes repossessed.
"This is a ticking time bomb," says Hugh Stickland from Citizens Advice.
"It's very important people think about their money in the short and the long term."
Sounded good at the time
Interest-only mortgages allow people to buy houses and then make relatively small monthly payments. The problem is that these payments only cover the interest on the mortgage.
At the end of the mortgage term, lenders must pay the full amount that they initially borrowed.
Interest-only mortgages used to be combined with endowment policies that were designed to pay off the mortgage debt.
However, when endowments began to perform badly, lenders continued to offer interest-only mortgages to people - typically those who were struggling with affordability.
By 2007, 33% of mortgages being taken out were interest-only, say the Council of Mortgage Lenders.
Waves of repossessions
The problem now is that there are 3.3 million mortgage holders with interest-only products.
Around 1.7 million of these say they have no linked repayment vehicle.
Indeed, Citizens Advice say that 432,727 people "haven't even thought about" how they will repay the capital.
The problems are set to really begin in 2017, when interest-only mortgages taken out near the millennium will need to be repaid.
Gillian Guy, Chief Executive of Citizens Advice, said that many people "face losing their home".
The Financial Conduct Authority (FCA) agree, predicting high numbers of repossessions in 2017/2018, 2027/2028 and 2032 - dates that coincide with previous peaks in interest-only mortgage sales.
Who's most affected?
The older generation are most at risk - credit ratings agency Moody's says that 75% of mortgage borrowers aged over 60 have an interest-only product.
Caroline Abrahams, charity director of Age UK, said she was particularly worried by "the growing number of people entering retirement with a sizeable mortgage debt, but few ways of repaying it".
The average shortfall for people with a mature interest-only is mortgage is estimated to be £71,000.
Many are turning to their pension savings for help. This has been made easier by recent pension freedom reforms, which mean that over-55s can access the full amount of any defined contributions pension.
According to the Association of British Insurers, nearly a quarter of a million people took money out of their pension pots in April and May alone.
One pension provider - Fidelity - said that 29% of its customers were using cash withdrawals to pay off debt.
Consumer groups believe banks and building societies should be doing more to help alleviate some of the forthcoming problems.
At the moment, lenders don't have to consider alternative options before repossessing homes.
With other types of mortgage, they have to discuss things like extending the length of the mortgage, changing the types of mortgage, or giving people enough time to sell their home if necessary.
Gillian Guy, from Citizens Advice, says that:
"Lenders have to exhaust all other options when borrowers get into arrears - it's time to level the playing field so that interest-only customers get the same protections when their mortgages mature."
An end to interest-only?
Thankfully, interest-only lending was curbed in 2012, when new rules stipulated that this type of mortgage couldn't be sold without a pre-arranged repayment plan.
This resulted in many banks and buildings societies removing them all together - in 2014, the CML said that interest-only loans accounted for just 3% of the mortgage market.
However, they do seem to be making a return.
This year Barclays, Santander and Leeds Building Society have made it easier for people to take out interest-only mortgages, with RBS/Natwest expected to follow suit.
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