Nearly One Million Will Face Mortgage Difficulties
The most read story on BBC News today was the news that almost one million people in the UK will "face difficulties" paying back interest-only mortgages. It has come to light that the position of borrowers with interest-only mortgages was much graver than previously thought, leading Citizens Advice to declare that 934,000 people could face having to sell their homes or even have their homes repossessed when they reach the end of their mortgage terms.
There is growing concern that borrowers have no plan for resolving the remaining debt on their homes when their mortgage term expires. Lenders were all too happy to give out interest-only mortgages until restrictions were tightened up three years ago, but many people were sold these mortgages without fully understanding the consequences of an interest-only mortgage. Now these borrowers are paying the price. An interest-only mortgage means that with every mortgage repayment, borrowers are only paying back the interest on the loan, without ever knocking down the capital on the loan. This means that if you took out an interest-only mortgage for £150 000, you are only paying the interest on the loan. When your mortgage term expires, you will still owe the bank the full £150 000. If you have no way of paying it back, your home could be repossessed. Citizens Advice estimates that of the 934,000 people who are in this position, roughly half have not even thought about what will happen when they reach the end of their mortgage term.
For people entering the last few years of their interest-only mortgages, it is imperative to have a plan in place to pay off the remaining capital in the loan. This can be extremely challenging due to the nature of interest-only mortgages. Borrowers are expected to pay back the entire value of what their house was worth when they bought it. House prices simply won't recover enough in the span of a few years for people to be able to pay back the capital by selling their home.
Further compounding the problem is the fact that interest rates are set to rise in January. The Bank of England interest rate is currently sitting at 0.5% but it could rise to 2.5% over the next three years. Since the Bank of England rate is what all other banks and building societies base their own interest rates on, people on interest-only mortgages will see their repayments go up. There are already people who find their payments unaffordable due to changing circumstances, but the rise in interest rate will mean that more people's mortgage payments will become unaffordable.
At GDP Equity Experts, we've seen the consequences of all this first hand, as interest-only mortgages turn up again and again for our clients. We have worked with many clients whose mortgages were with Capital Home Loans (CHL), a big lender of interest-only mortgages. CHL is no longer acting as a mortgage provider, meaning that for our clients who have interest-only mortgages with CHL, there is no possibility of renewing or extending their mortgages: the relationship must end at the end of the repayment period. This has been an enormous source of stress for our clients with interest-only mortgages.
Fortunately, we have had great success with helping clients in this position. With nearly one million people in this position, banks must do more to help, but they are beginning to listen to and work with borrowers. One of our recent clients owed £91,000 at the end of her interest-only mortgage term. We helped her to create a proposal to the bank offering £5,000 in full and final settlement of the outstanding debt, and the bank accepted.
The BBC is predicting the first of three waves of major repayment problems to hit in 2017-2018, when mortgages sold in the 1990s will mature. With this in mind, it is imperative for borrowers with interest-only mortgages to prepare for the end of their repayment period. Our clients have often told us that they wished they had come to us a year sooner. Paying back the capital on an interest-only mortgage is a daunting task, but planning for it is the only way to tackle it in a productive way and put your mind at ease.
Last month, we had our busiest month since we started our business in 2010. The problems our clients experienced then are still largely the same issues today. The solution, as always, is education around money and finance and putting a plan in place for you, your family and your business' future. That's what we do at GDP.