MortgagesMay 27 2016

Interest-only mortgages become a lifestyle choice

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Interest-only mortgages become a lifestyle choice

Interest-only mortgages are available - but mostly as a lifestyle choice, a mortgage specialist has claimed.

Jaedon Green, director of products and distribution for Leeds Building Society, said: “Historically, some consumers may have perceived interest-only mortgages as a way to minimise monthly repayments.

“While the Mortgage Market Review did not actively seek to deter interest-only mortgages, it does require lenders to assess affordability on a capital and interest basis. In effect, this means Interest-only mortgages are available as a lifestyle choice.”

His comments came as data earlier this year from Saga’s Equity Release Advice Service suggested 1.8m over-50s with an interest-only mortgage had intended to pay it off with an endowment policy, but the return from this is not going to be enough to pay their mortgage off in full.

According to Saga, there are about 600,000 interest-only mortgages set to mature in 2020, with an estimated 10 per cent of mortgages with no repayment plan in place.

The next tranche of interest-only mortgages will reach a maturity peak around 2027 to 2028, as a result of deals sold in the early to late 2000s.

Many will have back-up options even where their intended repayment strategy does not work out as they had hoped FCA

The regulator’s own research in 2013 extrapolated projections to 2027 to 2028. Within this timeframe, the FCA research predicted:

■ 2.6m interest only mortgages will be due for repayment.

■ While 90 per cent - 2.34m people - have a strategy to repay their mortgage, 10 per cent do not – equivalent to 260,000 people.

■ Estimates produced for the FCA suggest 48 per cent of people do not have the ability to fund the shortfall.

■ Borrowers believe their shortfall will be, on average, £22,100. Estimates produced for the FCA are approximately half these shortfalls are expected to be over £50,000.

■ Those expecting a shortfall say they will use savings (21 per cent) or downsize (19 per cent) to pay off their mortgage, while 15 per cent say they will remortgage.

The FCA document said: “Many will have back-up options even where their intended repayment strategy does not work out as they had hoped.”

Dean Mirfin, technical director at Key Retirement, warns: “The first major wave of interest-only maturities is naturally the most worrying as those with more years to go potentially have time to plan and do something about it.

“For now, those with maturities looming, time is running out. What we can be sure of is we are seeing more clients than ever with no repayment method at all, nearing maturity and just hiding, hoping something will come up.”

To learn more about this subject read FTAdviser’s Guide to Interest-Only Mortgages and qualify for 60 minutes’ worth of structured CPD.