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1.6m homes on interest-only deals with no repayment vehicle

One in seven UK households are sitting on an interest-only mortgage with no repayment vehicle, new research shows.

Unbiased.com data shows 1.6m properties are simply paying off the interest each month and not repaying capital or saving anything towards paying off their mortgage debt in the future.

Karen Barrett, chief executive at unbiased.co.uk, says: “With incomes squeezed, it’s not surprising that many people are trying to save money by sticking to interest only mortgages, but this is a potential ticking time bomb”

Nearly all major lenders have clamped down on interest-only lending in the last month by reducing LTVs and tightening criteria.

The Financial Services Authority is also turning the screw on interest-only deals without repayment vehicles in its mortgage market review although it has admitted it may be powerless to tackle the interest-only time bomb.

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Would like to see that research Ms Barrett -are you sure that ALL of the 1.6m properties on interest only are “not repaying capital or saving anything towards paying off their mortgage debt in the future” as I don’t recall you asking me. My household is on an interest only mortgage and I’m saving towards paying off my mortgage with a number of investment vehicles (like a good proportion of the other 1,599,999 households I would suggest). This is not news, it’s speculation and self promotion.

  2. It is all very well removing these interest only from the market but what about the people who are now trapped with interest only and cant get a repayment mortgage. There are people who have consistently paid their mortgage on an interest only basis with a view to changing to repayment, not defaulted or dont anything wrong and now will be penalised

  3. This sort of talk by regulators concerns me.

    I know of many clients who have other assets way in excess of the o/s mortgage but they choose to leave the mortgage outstanding for various reasons.

    Making banks & building society underwriters prove they have the means to repay later is going to be tricky, as it is not quite as simple as tick a box due to financial complexity. The end result will just be the withdrawal of interest only like we are seeing now, which is not the intention.

  4. There is nothing wrong with interest only mortgages provided the borrower FULLY understands the risks. I have part interest only (incidentally, on a 0.49% above base for life of mortgage) and am making other provision for repayment via investment vehicles.

    Thinking about this, if someone had taken out the same mortgage as myself a few years ago, the interest paid to the lender is substantially less than any equivalent London rental. In this type of example, worst case scenario, if negative equity finally occured, then at least the borrower would have lived at a very low London ‘rent’ for perhaps 20 or 25 years! (And very unlikely to be in negative equity over this time period anyway!)

    The previous commentators have also made some good points. The FSA’s MMR is too broad in its recommendations. I wonder how many of their supervision / project teams have actually obtained mortgage qualifications or gained real working experience? (I actually know the answer – not many if any! – Same goes for L4 quals, too).

  5. My view is those who cannot afford a repayment mortgage are still better off then those renting.

    They have security that the landlord is not going to move them on, they can do as they please with the decor and over time the equity content will rise. Where as the tenant pays rent and has no prospect of gaining anything ever and thanks to changes in lending will find it harder and harder to get a mortgage.

    Well done to those with the foresight to make the jump from tenant to home owner because life for those who have not made this decision you can look forward to a bleak future of long term renting.

  6. Agree with Gaaza
    Interest only mortgage, in many cases, is far cheaper than paying rent in the big cities.
    round here a 3 bed modest property is around £1000pcm how many young couples can afford that? or would want to pay that with nothing to show for it after years of shelling out on rent.
    The only people who will benefit is landlords.

  7. It should be a requirement that when any research is published such as above, the sample size and demographics should also have to be added so readers can form a fair opinion of how invalid the actual figures quoted are.

    As with most things FSA, you actually need to look behind the smoke screen they put up and locate their real reason for what on face value are just ill conceived rules that penalise the people they are apparently to protect. Capital Adequacy is the issue here, the FSA do not want money held outside the banks as this means their risk does not reduce. When this is coupled with the massive loans the banks still have to repay because of the credit crunch, it is a wonder that the Banks need to be told that this is the way forward.

  8. Why is this being described as a time bomb? Are 1.6m people suddenly going to find themselves homeless sometime in the future? Are property values never going to rise again leaving all these people with zero equity? If it is a time bomb for home owners then I fear the worst for those who are renting unless somehow they are better off than said people on interest only mortgages. Arguably the time bomb is for people who are renting with zero savings and zero chance of any equity.

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