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Remortgaging could become the next interest-only crisis – Phillips

by: John Phillips, national account director of Just Mortgages and Spicerhaart
  • 02/08/2019
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In May 2018, UK Finance reported that 1.7 million interest-only mortgages were outstanding in the UK with around 200,000 due to mature by 2020.

 

While most of those borrowers will engage with their lenders and agree on a resolution, many are more reluctant because they fear they simply have no way of paying back the outstanding debt.

And equally, many lenders were burying their heads in the sand, unwilling to start proceedings against interest-only borrowers.

The FCA’s thematic review raised the urgent need for all lenders to deal with interest-only borrowers in both a timely and compassionate way, and things have certainly improved.

Many lenders are now engaging with third parties to find solutions for borrowers who have an interest-only mortgage with no repayment vehicle in place.

Now the issue of interest-only is being tackled, you would think that there is no need for this type of situation to occur again.

Lending criteria is much stricter than it was when many of these interest-only customers were first accepted for mortgages, and for those who are already struggling, or are likely to, there are now many more solutions available.

 

New crisis brewing

But I fear there could be a new ‘interest-only’ crisis starting to brew.

The latest figures from UK Finance reveal a huge increase in remortgaging volumes, with a 19.8 per cent increase in new remortgages with additional borrowing.

The average additional amount borrowed is now £52,000.

Many of these people will be remortgaging to add value to their homes – perhaps using the money to extend or make other improvements.

But there is also a worrying trend whereby borrowers are refinancing every couple of years and taking equity out when doing so.

This, of course, means that despite having a capital repayment mortgage – which in theory means that at the end of the term they will be debt-free – many of these borrowers are simply building up debt as they go.

And we could see a situation where borrowers are reaching the end of their mortgage term and have not repaid because they have remortgaged too many times.

 

Can they handle repayments?

Meanwhile, others will still be saddled with mortgage payments well into retirement from the additional borrowing they have added to their loans and extending their original 25-year-term considerably.

Remortgaging with additional borrowing is not only up almost 20 per cent on last year, but almost 11 per cent on last month, which was already a 27 per cent increase on the month before, and it is certainly a trend we have seen over the last few months.

Like with interest-only customers that are either struggling or may struggle in the future, lenders should be looking now at customers who have remortgaged and taken on significantly more debt to ensure that they can handle their repayments.

 

 

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