Almost three-quarters of homeowners with interest-only mortgages are worried they may not be able to repay their loan, according to Ocean Finance.
The mortgage broker commissioned Red Dot to survey a nationally representative sample of 2,005 adults last month.
Interest-only deals mean borrowers pay the interest on the loan during the life of the mortgage and then must repay the capital when the mortgage term ends.
Just 31 per cent of the interest-only borrowers questioned said they have a separate investment policy in place, such as an endowment or an Isa, to pay the capital.
While 16 per cent said they plan to switch to a repayment mortgage before their current loan ends, 31 per cent said they expect to have to sell their home to settle the outstanding capital and a fifth of homeowners said they did not have a plan in place to repay the capital.
Gareth Shilton, a director at Ocean, said interest-only has become “a time-bomb” because so many people took out the products to cut the cost of their mortgage, with no view of how they would repay the capital element.
He said: “It is advisable to seek advice on whether they can overpay on their current interest-only deal, switch to a repayment mortgage, or use an Isa or pension to settle the capital payment.”
At the start of September, Citizens Advice warned around a million people could have their homes repossessed because they have no way of paying off their interest-only mortgages.
It noted that many of those who seek the charity’s help say they were not made aware of the need to repay the capital at the end of their term, with the average shortfall estimated to be £71,000.
Responding to the CAB, the Financial Conduct Authority denied the need for intervention in the interest-only market, with acting director of supervision, retail and authorisations Linda Woodall saying the regulator would only take action if it felt consumers were being treated unfairly – something it does not think is the case.
There are 3.3m mortgage holders in the UK who have interest-only products, although data from the Council of Mortgage Lenders showed that the number of interest-only loans has reduced by 16 per cent in the last year alone.
There were around 1.9m pure interest-only mortgages outstanding as at the end of 2014, according to CML members, with around 460,000 part interest-only mortgages.
Interest-only mortgages became popular in the 1990s as a way for consumers to afford homes at a time when property prices were soaring.
Lenders often agreed interest-only loans without confirming borrowers could repay the capital owing at the end of the mortgage, according to Ocean, although by the end of 2012 most lenders stopped offering interest-only deals after tightening their lending rules.
The research showed just over a fifth of borrowers with interest-only mortgages do not feel they were given adequate advice about repaying the capital portion of the loan when they took out their mortgage.
Mr Shilton said while there is a place for interest-only mortgages, it is a specialised product that suits a small number of borrowers.
“Interest-only mortgages are now typically only being approved for borrowers who can demonstrate they have a repayment vehicle or pension pot that is forecast to repay the capital element,” he stated, adding that usually borrowers also need to have a significant deposit that gives them a big equity gap.
peter.walker@ft.com
