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1.6m households on interest-only lack a repayment vehicle

by: Mortgage Solutions
  • 28/03/2012
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1.6m households on interest-only lack a repayment vehicle
One in seven UK households on an interest-only mortgage have no repayment vehicle in place to repay the mortgage debt in the future, research has found.

According to unbiased.co.uk, 1.6m households are just paying off the interest on their mortgage each month, and not repaying any of the capital amount owed or saving anything towards paying it off in the future.

Karen Barrett, chief executive of Unbiased.co.uk, said: “With incomes squeezed, it’s not surprising that many people are trying to save money by sticking to interest-only mortgages, but this is a potential ticking time bomb.”

Over the past few weeks, many of the UK’s biggest lenders have clamped down on their interest-only lending including Santander, Halifax, Nationwide and Coventry building societies – all of whom have slashed their maximum interest-only LTVs to 50%.

In the Council of Mortgage Lenders (CML) latest News and Views, it said there are around 3.9m outstanding interest-only mortgages. Of these, two thirds are set to mature after 2020.

The number of interest-only mortgages set to mature each year is between 131,000 and 158,000. This compares with around 7.3m capital-and-interest mortgages currently held by UK consumers.

The CML said that it is likely these borrowers have a suitable repayment vehicle in place.

“The proportion of borrowers unable to repay their mortgage at term is likely to be small, but difficult to quantify. Depending on what happens to house prices before their mortgage matures, they may see the real value of their debt eroded and their equity increased, irrespective of any additional steps that they take to pay down capital.”

The CML added that lenders are working collaboratively to consider how and when they might contact interest-only borrowers pro-actively to discuss their repayment plans, what tools they can use to address those cases where borrowers currently have inadequate provision for repayment, and what alternatives to full repayment might or might not be appropriate for different types of households.

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