https://www.ft.com/content/4e0377e6-6ad4-11e7-bfeb-33fe0c5b7eaa
So apparently one fifth of all mortgages are interest only, which is 1.9 million people seemingly and a lot of them aren't touching their debt at all...
Looks to me that repossessions are back in order soon, there's also other debt ridden issues looming, like car rental (though it seems to be more of an American problem, i'm sure it's similar levels here).
So we've really hit the jackpot on screwing ourselves, hope people enjoy this wild ride.
Ohh and savings are collapsing as well, sitting at around £5.8 billion, below even at the worst of 2007/8.
Linda needs to have a difficult conversation with her son. The expectation was that one day, he would inherit the family home in London where she still lives. But her decision to take out an interest-only mortgage of £182,000 nearly a decade ago has effectively cost him his inheritance.
Few questions were asked when the 66-year-old part-time school teacher took out the loan following a family crisis, and the 10-year term is close to running out. Since then, she has paid more than £70,000 in interest — but not repaid a penny of the underlying debt.
“I’ve had a letter from my lender asking what I intend to do, but I’ve ignored it,” she says, admitting she has no way of paying off the debt. “It gives me headaches just to think about it.”
The options for Linda — and many thousands of other borrowers like her — are not pleasant. At her time of life, obtaining another mortgage will be difficult. She could clear the debt by selling her £550,000 home and “downsizing” to a smaller, cheaper property, but this would mean moving miles away from her friends and family. An equity release agreement would mean she can stay put — but the effect of the interest charges rolling up will almost certainly extinguish any inheritance for her son.
Around a fifth of all outstanding residential mortgages in the UK are interest-only, according to the Council of Mortgage Lenders, which estimates that about 1.9m borrowers are just paying off the interest on their debts without making a dent in the underlying capital.
While financial regulators have massively restricted the type of borrowers who can access credit in this way, a “repayment crunch” is looming for those affected. What will the consequences be for the housing market — and how will those with outstanding loans cope — if house prices fall, and interest rates start to rise?
Ticking time bomb
“We’ve definitely got an interest-only mortgage ticking time bomb scenario,” says Adrian Anderson, mortgage broker at Anderson Harris. “Lots of people in the past took out interest-only mortgages at much higher loan-to-value ratios than would now be granted, and people took them out without thinking about how they would pay them off.”
It is estimated that one in 10 borrowers has no plan in place to repay the capital when the loan term expires — and even those who have a plan may find it falls short. Back in the 1990s, interest-only loans were often sold with endowment policies — a stock market linked investment designed to repay the capital at the end of the loan term while the borrower serviced the interest. However, many policies are worth less than expected, and borrowers have accused lenders of mis-selling, saying they did not understand the risks.
This year and next, the Financial Conduct Authority expects to see “peak maturity” of such mortgage plans sold in the 1990s and early 2000s. The people who took out these loans are likely to be approaching retirement, so may have trouble obtaining another loan if their endowment fails to cover the repayment. However, house price rises across the UK mean the FCA forecasts most will have relatively high levels of equity in their property.
The second crunch point is expected in 2022. This is when the FCA forecasts that a large tranche of interest-only mortgages issued between 2003 and 2009 will start to mature, peaking in 2028. However, these loans — issued at the height of the credit crunch — were typically advanced to borrowers classified as “less affluent” who will be in their 40s and 50s when repayment is due.
Before the financial crisis, interest-only mortgages were commonly issued to people who could not afford the repayments on a conventional mortgage (combining capital repayments with interest charges).
The monthly repayments were lower, meaning borrowers on lower incomes could get the keys to their dream home. L&C Mortgages, a broker, estimates that for a typical mortgage of £200,000 at a 2 per cent interest rate for 25 years, a borrower on a repayment plan might pay almost £850 a month, while an interest-only borrower would pay just over £330 to the lender. But some now risk losing those homes as the underlying debts fall due.
Gary, a self-employed fitness instructor, is one borrower worried about his interest-only mortgage. He’ll soon have to hand over a lump sum of £129,000 to his bank, but it is money he doesn’t have.
“We didn’t have things explained to us,” says Gary, who lives with his wife and daughters in Luton. “Anyway, our hands were kind of tied at the time — it was more or less our only option.”
Currently paying a monthly interest rate of 4.29 per cent, Gary has been struggling to find another mortgage.
“In the past, people took them out because they were cheaper and easier without being able to repay them,” says Mr Anderson. “[Choosing a product] because you can’t afford anything else is not good.”
Lenders may allow borrowers to extend their loan term if they can switch to a repayment (or part-repayment) mortgage, but this will depend on their age and income level. As regulators have cracked down hard on interest-only loans, if borrowers cannot satisfy affordability tests, or demonstrate how they will repay the capital, then selling up may be their only remaining option.
So apparently one fifth of all mortgages are interest only, which is 1.9 million people seemingly and a lot of them aren't touching their debt at all...
Looks to me that repossessions are back in order soon, there's also other debt ridden issues looming, like car rental (though it seems to be more of an American problem, i'm sure it's similar levels here).
So we've really hit the jackpot on screwing ourselves, hope people enjoy this wild ride.
Ohh and savings are collapsing as well, sitting at around £5.8 billion, below even at the worst of 2007/8.
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