The interest only time bomb

The interest-only mortgage timebomb is ticking loudly and will only get louder according to statistics revealed in the Financial Conduct Authority’s (FCA) thematic review into interest-only mortgages, which was published earlier this year.
 

The review revealed there are now 2.6m interest-only mortgages due for repayment by 2041.

 

 

Worryingly, as many as 48% of those face a shortfall at repayment day, with an average figure of around £71,000.

 

 

Even more worryingly, the review found that 260,000 (10%) borrowers have no repayment plan of any kind.

 

 

Many of these borrowers believe they only have very limited options. Either they can hope that their mortgage provider does not notice that their mortgage term has ended and continue paying interest as they have always done, or they can sell their home.

 

 

By downsizing to a smaller property they could afford to pay off the original mortgage. The first option, for obvious reasons, is unlikely and just not sustainable in the long term, while the selling up option is undesirable for many.

 

 

At the same time, recent figures have revealed that the UK’s over sixties are sitting on properties with a total value of £1.28 trillion - a massive figure, illustrating the potential of utilizing property effectively to support the income of older homeowners and help those struggling for viable options when dealing with their interest-only mortgages.

 

 

A growing amount of customers are older homeowners with interest-only mortgages who are faced with the problem of their own personal mortgage ‘timebomb’ and losing their homes if they do not have sufficient funds at the end of the mortgage term to pay off the remaining debt.

 

 

An equity release lifetime mortgage can offer a solution to this, as it allows homeowners to unlock capital from their home whilst retaining ownership of their own home, negating the need to downsize.

 

 

If you are sitting on a valuable asset why not use it to your advantage?

 

 

A lifetime mortgage also means very little change from the customer’s current mortgage situation, as they can continue to make monthly interest payments as they have always done.

 

 

However the key benefit is that the customer no longer has to worry that their mortgage provider will come knocking on their door asking for the remaining debt.

 

 

After all, they have probably spent much of their life looking after their home – isn’t it time perhaps that their home looks after them?

 

 

If you know someone who potentially may be facing this problem, I would be more than happy to talk to them about it, and go through the options available to make sure that their roof stays exactly where it should be – over their head.

 

 

As always , thanks for your attention.

 

 

Mark (mark@themortgagemonkey.co.uk)

Interest rates could start to rise in 2014

The quarterly inflation report out today suggested the Bank of England could raise rates as early as the end of 2014 if unemployment continues to tumble and the economy improve.

 

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Governor of the Bank of England Mark Carney commented Bank statisticians forsee a 40% chance unemployment will reach the 7% threshold by the end of next year. He added there is a 60% chance it will happen by the end of 2015.

Under the terms of Carney's Forward Guidance, the MPC will not consider raising rates until unemployment hits the 7% trigger.

He said: "Through that guidance we are giving businesses and households the confidence that interest rates won't go up until jobs, incomes and spending are recovering at a sustainable pace.

"In line with the unexpected strength of demand, the unemployment rate has fallen a little more rapidly than expected in August. That is to be welcomed: 100,000 more people are in work as a result."

Carney said the unemployment threshold is a staging post for assessing policy, not a trigger for an automatic increase in Bank Rate.

"When the threshold is reached, the MPC will set policy to balance the outlook for inflation against the need to provide continued support to the recovery in output and employment," he added.

With the recovery taking hold, our task now is to secure it, he said.

But he added that the bank will remain vigilant to risk to stability from the housing sector, in terms of price rises or household leverage.