Clearing up the interest-only mess

Only about 10 per cent of current interest-only mortgage holders are reported to be without a repayment strategy, but this still needs to be dealt with, says Laverne Hadaway in this month’s mortgage spotlight.

Changes brought about by the Mortgage Market Review (MMR) mean that many lenders have chosen to withdraw from the interest-only mortgage market, she says, which averts a potential future crisis of borrowers being left with capital to repay at the end of their mortgage terms.

She highlights affordability as one of the biggest issues around interest-only mortgages. “It is...likely to have driven borrowers’ choices and got them into the predicament in which they find themselves today, Ms Hadaway says. “The FCA’s research showed that 39 per cent of respondents chose an interest-only mortgage because of lower monthly payments, while 22 per cent chose it because it was the only mortgage they could afford.”

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Ms Hadaway acknowledges that there is no perfect solution for those facing the end of their term with no repayment strategy, highlighting that switching from interest-only to repayment immediately increases the monthly payment which will not be a viable option for all borrowers, and extending the term may also have serious implications if it takes a borrower into retirement.