Repayment crisis threatens millions of homeowners

Published 21st Aug 2009

Many of the four million homeowners who took out interest-only mortgages are facing a crisis because they have no way of repaying their home loans.

Figures from the Financial Services Authority, which has regulated mortgages since 2004, show that 38 per cent of Britain’s 11.1 million homeowners — or more than one in three — may have made inadequate provision to pay off their capital sum. Many are in negative equity and the savings products taken out to cover the capital repayments have fallen short. That 38 per cent figure does not include those with endowments or buy-to-let investors who took out interest-only mortgages to keep the cost down.

Experts said that homeowners who pinned their hopes on their house covering the cost of paying off the mortgage were most at risk after house price falls of 22 per cent from peak to trough, according to figures from Halifax.

A spokesman for the FSA said: “At the top of the market it was the case that for a lot of borrowers, interestonly was the only way they could afford to buy. For these borrowers it becomes increasingly difficult to pay off the capital as time goes on.”

A spokeswoman for the Council of Mortgage Lenders said that at the moment homeowners cannot rely on house-price inflation to cover the capital repayment. “They will have fewer options available if they get into difficulty, as switching to interest-only is a coping strategy when you have payment problems.”

Interest-only deals first appeared in the early eighties alongside endowment policies. Endowment mis-selling in the late eighties brought an end to their common use as a repayment vehicle but the concept of interest- only remained. About 40 per cent of borrowers on interest-only deals took them out before 2003, according to moneysupermarket.com, although there was a surge in applications in 2006 and 2007, as house prices rose.

Ray Boulger, of John Charcol, the mortgage broker, said: “We need to worry about those who have taken out interest-only loans but not thought through how they will pay it back.”

Banks have put limits on borrowers switching to interest-only loans in the past few months because of the risk that they will not be repaid.

The proportion of loans being approved that are interest-only has fallen from 42.4 per cent to 32.5 per cent in the past two years, according to the FSA.

Under current guidelines, borrowers taking out interest-only must have a repayment plan in place. However that can be as little as a monthly savings account, brokers said. Lenders would previously allow struggling borrowers to switch to interest-only on the understanding that the move was temporary. However banks do not have the power to force borrowers to return to a more traditional capital and interest repayment mortgage.

The proportion of loans that are being repaid on a capital and interest basis has fallen from 53.1 per cent at the end of 2007 to 51.7 per cent, indicating that switching to an interest-only loan has continued.

Source: ' Times '

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