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The Interest-Only Mortgage Legacy


A report due out in May, compiled by the Financial Services Authority (FSA), is expected to announce that nearly four million home owners are at risk of losing their homes as the capital on their interest-only mortgages becomes due.  Although access to this particular loan type is very restricted, it is believed that there are still around 3.8 million of them outstanding and that approximately 150,000 interest-only mortgages will mature each year between now and 2020.

An interest only mortgage is just that; the customer pays only the interest due on the capital amount borrowed (i.e. the price of the house, less any deposit) & so the payments are relatively small.  The borrower should then be paying into an alternative investment vehicle to ensure that the capital amount is achieved when it becomes due at the end of the loan term.

Interest-only mortgages became popular, alongside endowment mortgages, in the 1970s and 1980s as house prices rocketed, thanks to inflation.  The product peaked in the late 80s, as interest-only mortgages accounted for 80% of all home loans taken out at that time.  Many homeowners turned to them in the decade following the millennium, as property prices rocketed once more and borrowers believed that they would be covered by the rising value of their homes. 

Of course it has been a very different story since the peak of the housing boom in 2007, and now new borrowers will struggle to find an interest-only mortgage.  According to the Council of Mortgage Lenders, just 10% of all new mortgages last year were interest-only; banks now reserve them for their richest customers & if they offer them at all.  At the very least, a borrower will have to prove that a parallel investment vehicle is in place.

HSBC and Yorkshire Building Society have become the latest big names to limit the sales of interest-only mortgages.  They join Nationwide, the Co-Op and Royal Bank of Scotland, who have already barred new customers from these deals.

So what can you do if you've currently got an interest-only mortgage?  Switch to a repayment mortgage if you can afford to.  In some cases it may be possible to get a deal that is part repayment and part interest-only.  Some banks, for example, will lend up to 75% of the loan on interest-only and the rest on repayment terms.  If you don't have a repayment vehicle then think about getting one as soon as possible, or switch to a repayment loan.

The sooner action is taken, the better.
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Description: Graph showing the number of interest only mortgages maturing each year between 2012 and 2020. 
The Number of Interest-Only Mortgages Due to Mature by Year

Sources: thisismoney.co.uk, moneysavingexpert.com (image courtesy of redferret.net)