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Interest-only mortgage holders warned of ticking-time-bomb

Posted in: Research Last updated: 05 Oct 2016

A quarter (27%) of all interest-only mortgage holders may not be able to pay back their loan, according to new research from financial mutual, OneFamily. The study adds to growing evidence that interest-only mortgage holders face a ticking-time-bomb with the expected average unsettled debt estimated to be £21,000.

OneFamily, which launched a new range of lifetime mortgage products earlier this year, commissioned the Centre for Economics and Business Research (Cebr) to analyse the market for residential interest-only mortgages and people’s repayment plans.

The study found that nearly one in five (18%) mortgage holders admit that they do not understand their loan, while almost a quarter (23%) do not know what interest rate they are paying. Most worrying is that 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.

OneFamily CEO Simon Markey said:

“Our research adds to a disturbing picture facing thousands of homeowners who do not yet know how they are going to meet their mortgage obligations. 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.”

The Cebr study also found that those who do have plans for repaying their interest-only mortgage may find they need to rethink their strategy. Methods to pay off interest-only mortgages include:

  • Downsizing: One in four (24%) mortgage holders plan to sell and move somewhere else to pay off their initial loan. However, a fall in house prices could leave homeowners in negative equity making the option impossible.
  • Overpayments: One in four (24%) mortgage holders 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.
  • Endowments: One in five (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 homeowners short of the funds they need.

Simon Markey, CEO of OneFamily, continued:

“For homeowners in or approaching retirement, Lifetime Mortgages offer a real alternative. They give families more choice and greater flexibility in how they manage their finances. They are also a great solution for people facing a repayment shortfall at the end of their interest-only mortgage and a means of unlocking capital while staying in the family home.”

OneFamily Lifetime Mortgages