A million interest-only mortgage holders 'face repossession'

Almost a million people have no strategy in place for repaying their interest-only mortgage and could face repossession as a result, Citizens Advice has warned.

Research from the charity estimates that 934,000 people have an interest-only home loan and do not have a plan for how they will pay it off when it matures. That is much higher than a previous estimate issued by the Financial Conduct Authority in 2013, which put the number at around 260,000.

Citizens Advice said “time is running out” for some homeowners, who would either have to sell their home or find the money from somewhere to pay off the debt, or risk having the property repossessed.

Its research represents the latest in a series of warnings about interest-only mortgages, which have helped millions of people on to the housing ladder during the past two decades but have in recent years become the subject of a regulatory clampdown.

With this type of loan, the borrower agrees to pay off the interest each month but makes no capital repayments. Borrowers are expected to make sure they have an investment plan in place to pay off the debt at the end of the term.

In 2013 the FCA published research showing that up to 2.6m interest-only mortgages will mature by 2041, of which almost half of the homeowners may be unable to repay the loan at the end of the term. However, 90% of the borrowers said they had a repayment strategy in place to repay what they owed.

The Citizens Advice research, which included a YouGov poll, suggests the regulator may have underestimated the scale of the problem. It puts the number of people holding interest-only mortgages at 3.3 million. The charity said that included 1.7 million who said they had no linked repayment vehicle, such as an endowment or Isa, and 934,000 who had no strategy for repaying the loan. More than 430,000 people “have not even thought about how they will repay the capital”, it said.

The rules were tightened in 2012 to ensure that interest-only mortgages were no longer available without a repayment plan, and this has led to a large drop in the number of products sold.

Citizens Advice supported this change but said people who already hold these mortgages need more support.

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. It’s time to level the playing field so that interest-only customers get the same protections [as other borrowers] when their mortgages mature.”

The FCA has said it expected banks and building societies to treat interest-only customers fairly and not “exploit” their potentially tricky situation.

In its guidance, the regulator said it recognised that “customers are responsible for repaying their loans, and repayment of the capital at the end of term is a contractual requirement”. It said lenders “are not obliged to offer options at maturity”, such as extending the mortgage term, but they should consider what they can do to help.

There are various options for people in this situation. One is to increase the monthly payments on their mortgage. Anything above their normal amount will help reduce the capital they owe. Switching to a repayment mortgage is the ideal option, but because an individual will be repaying capital each month as well as interest, their monthly repayments will be higher. Alternatively, some might prefer to put more money into investments or savings to use later to pay off the debt. Meanwhile, some people will be able to remortgage to a cheaper deal.