Mortgages  

CAB warns a million can’t repay interest-only loans

CAB warns a million can’t repay interest-only loans

Citizens Advice has said that around a million people could have their homes repossessed because they have no way of paying off their interest-only mortgages.

New research from the charity found that 934,000 people have interest-only mortgages and do not have a plan on how to pay if off when their term ends.

Citizens Advice said that time is running out for some people, who will either have to sell their homes, find the capital to pay off the debt or could risk having the property repossessed.

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It added that some of the people who came to the consumer champion said they were not made aware that they would need to repay the capital at the end of their term, with the average shortfall was previously estimated to be £71,000.

There are 3.3m mortgage holders in the UK who have interest-only products.

Through polling the CAB commissioned with Yougov, it estimates 1.7m of these people have no linked repayment vehicle such as an endowment or Isa, while 432,727 have not even thought about how they will repay the capital.

In 2012, rules were tightened to ensure interest-only mortgages were no longer available without a repayment plan, which has resulted in a major drop in the number of products sold.

Citizens Advice said that it supported this change, but added that people who already hold these mortgages need more support.

A protocol was launched three years ago, which gives lenders a legal obligation to consider alternative options before starting possession action, including extending the length of a mortgage, changing the type of mortgage and giving people reasonable time to sell their property if necessary.

However, these protections do not apply to interest-only mortgages at the end of the term, rather at the very point when many customers discover they are in trouble.

Due to previous peaks in the sale of interest-only mortgages, the Financial Conduct Authority has said it expects there to be waves of potential repossessions in 2017 to 2018, 2027 to 2028 and in 2032.

In 2013 the FCA called on banks to contact all borrowers with interest-only mortgages ending before 2020 about how they plan to repay. But only around 30 per cent of borrowers responded.

The CAB argued that lenders should have to do more preventative work to help customers prepare for the end of their mortgage and recommended that lenders should have to follow steps before taking an interest-only borrower to court: a requirement to discuss a range of repayment options, moving to an alternative mortgage product, and enough time to sell their home for market price if necessary.

Gillian Guy, chief executive of Citizens Advice, said that people buy a home for stability – but interest-only mortgages have forced many into a financial black hole.

“Lenders have to exhaust all other options when borrowers get into arrears – it’s time to level the playing field so that interest-only customers get the same protections when their mortgages mature.