Mortgage timebomb threatens 320,000: They face homelessness over risky interest-only loans

  • 35% of 11.2million mortgages are interest-only deals
  • Up to 8 per cent of these are ‘in forbearance’, says FSA
  • Expert says low rates are creating 'zombie households'

By Becky Barrow for MailOnline

Published: 07:19 EST, 10 April 2012 | Updated: 19:36 EST, 10 April 2012


Up to 320,000 homebuyers with  interest-only mortgages risk losing their property because they are struggling to pay, the financial regulator warned yesterday.

The figures, based on research by the Financial Services Authority, reveal they have either missed or struggled to make a payment on loans which are specifically designed to be more affordable.

The scale of the problem follows recent warnings of a ‘ticking timebomb’ of interest-only mortgages.

Big dipper: How mortgage rates have fallen over the past five years. (Source RICS)

Big dipper: Mortgage rates have plunged over the last five years but, if they were to rise suddenly, thousands of people on interest-only deals would struggle to keep up with their repayments

Of the 11.2million mortgages in Britain, around 35 per cent are interest-only, meaning that the homebuyer pays only the interest every month, but not a penny of the capital.

In theory the mortgage-holder should save to pay off the capital at the end of the term, but nearly 80 per cent have no repayment strategy, according to the FSA. They have been categorised as ‘mortgage prisoners’.

Others have been saving, but have been bitterly disappointed by how their investments, such as endowments, have performed.

The regulator said between 5 and 8 per cent of these loans are ‘in forbearance’, which means the homeowner has either missed a payment, or made the payment late.

Default: The tactic of putting people on interest-only mortgages has helped to keep repossessions low. They peaked at 48,300 in 2009

Default: The tactic of putting people on interest-only mortgages has helped to keep repossessions low. They peaked at 48,300 in 2009

Experts warn that homeowners have little chance of keeping a roof over their heads if they cannot afford such mortgages with interest rates at a historic low.

For more than three years the Bank of England has kept the base rate at 0.5 per cent.

THE INTEREST-ONLY MORTGAGE TIMEBOMB

An interest-only mortgage offers a cheaper way to purchase a property than with a capital repayment mortgage, because borrowers are only paying off only the interest and not the capital.

For example, a £150,000 homeloan at 5 per cent over 25 years would cost £625 per month interest-only, and £877 per month capital repayment.

But at the end of the mortgage term, the interest-only loan will have paid off only the interest - leaving the original £150,000 debt to be repaid, whereas the repayment mortgage would have cleared the debt.

Erik Britton of financial consultants Fathom said: ‘We are creating zombie households that can only stay in their properties if interest rates are 0.5 per cent.’

Despite the base rate being frozen, around one million homeowners will be hit next month by a jump in standard variable mortgages.

The average increase is 0.62 percentage points, adding £53 per month to a typical £150,000 mortgage.

Before the credit crunch in 2007, it was easy for a homeowner to take out an interest-only mortgage without providing any evidence of how the actual loan would be paid off.

Other research by the FSA, published in December, shows the extent of the problem as these loans come to the end of their life, but the borrowers have no money to pay them off.

Between 2011 and 2020, it expects around 1.5million interest-only mortgages worth £120billion will be due for repayment.

Case study: A debt I just can't afford

Questioned by MPs recently, Martin Wheatley, a director of the Financial Services Authority, said: ‘There is a ticking timebomb that has been created over the last 20 years.’

To make matters worse, it will soon become much more difficult for homeowners with an interest-only loan to remortgage.

When new FSA rules come into force, probably in 2013, it will be impossible to take out an interest-only mortgage unless you can prove you are saving to pay off the loan.

A spokesman for the British Bankers’ Association said: ‘Banks are committed to treating customers sympathetically and will help where they can.’