Interest-only mortgages 'firecracker' rather than 'time bomb'

Interest-only mortgages 'firecracker' rather than 'time bomb'

Interest-only mortgages are less a “ticking time bomb” and more a “firecracker” according to Bovill’s mortgage specialist

But Darcy Tallon, a mortgage specialist at regulatory consultancy Bovill, said the “fuse still hasn’t been lit” on the former Financial Conduct Authority chief executive's warning.

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He said: “Time will tell if Mr Wheatley was right. The market has moved on, maybe due to his proclamation, but that time bomb is looking more like a firecracker at the moment. However, firecrackers can still cause discomfort.

“Interest-only mortgages remain high on the FCA radar and firms and consumers should not take the current economic environment for granted.”

A year ago research by Citizens Advice estimated that nearly 1m people had interest-only mortgages but had made no arrangements to pay them off when their terms end.

The FCA has said borrowers should not “stick their head in the sand” and engage with their lender.

He said: “The Council of Mortgage Lenders’s figures show a significant decline in the volume of outstanding interest-only mortgage balances.

“Prior to the Mortgage Market Review, much of the decrease was due to lenders tightening their criteria. The MMR changes made interest-only lending harder to justify, especially for higher loan-to-value.”

He said the “real test” would come after 2020 when a surge of interest-only mortgages mature.

But these people should not struggle to pay off their outstanding balance, Mr Tallon said, because of house price growth and low LTVs.

He said: “More worrying - is the second wave set to mature in the 2030s, which were initiated in the 2000s peaking in 2007.

“Many of these never had repayment vehicles, and interest-only was the only affordable mortgage available.

“Many had initially high LTVs, but with the value of the property increasing over time, these are gradually reducing.

“These borrowers also have time on their side, with the opportunity to switch to make overpayments to reduce the risk of a payment shortfall or switch to a repayment mortgage.”