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Citizens Advice reignites fears over interest-only time bomb

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  • 04/09/2015
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Citizens Advice reignites fears over interest-only time bomb
National charity Citizens Advice (CA) has warned 934,000 people have interest-only mortgages with no strategy to pay the loans off, despite the lender criteria clampdown in 2012-13.

The charity supported changes to lending criteria but warned more must be done to tackle the problem with so many at risk of repossession or forced sale.

CA said some borrowers were not made aware that they would need to repay the capital at the end of their term, with the average shortfall estimated to be £71,000.

The charity said that in the UK there are 3.3m mortgage holders who have interest-only products. It estimated 1.7m of these say they have no linked repayment vehicle, such as an endowment or ISA and 432,727 have no idea how to repay the capital.

The charity is concerned interest-only borrowers are not offered the same protection as customers in arrears when their term ends, despite the lender protocols obliging the lender to consider alternatives like a term extension, property sale or switching to a repayment mortgage at deal term end.

Gillian Guy, chief executive of Citizens Advice, said: “People buy a home for stability – but interest-only mortgages have forced many into a financial black hole.

“Lenders have to exhaust all other options when borrowers get into arrears – it’s time to level the playing field so that interest-only customers get the same protections when their mortgages mature.

“It is also important that people can get independent advice, guidance and support about how they can plan and manage their finances.”

The Financial Conduct Authority (FCA) expects the previous peaks in the sale of interest-only mortgages to translate into waves of potential repossessions in 2017-18, 2027-28 and 2032.

In 2013, FCA CEO Martin Wheatley said: “By acting now we are aiming to nip this problem in the bud.”

FCA research in 2013 suggested the majority of interest-only customers should be able to repay their loans when they mature. However, Council of Mortgage Lenders (CML) and Building Societies Association (BSA) members agreed to contact borrowers with loans due to mature by 2020 as an emergency measure to check repayment strategies and consider their options.

FCA commissioned research showed of the borrowers with loan terms due to finish by 2020, 90% have a strategy to repay, often with an endowment policy. Just under half are expected to have a capital shortfall, however, a third of those have no firm plans on how to repay.

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