Should Banks Offer Advice to Interest Only Borrowers?

Should Banks Offer Advice to Interest Only Borrowers?

Some financial experts have long believed that there is an interest only mortgage ‘timebomb’ in the UK just waiting to explode when millions of borrowers come to the end of their loan term and find they have not paid off their mortgage but have no provision for paying the outstanding amount they owe.

Should Banks Offer Advice to Interest Only Borrowers?

Most high street banks and building societies no longer offerthis type of lending and now the new City regulator, the Financial Conduct Authority (FCA), has stepped in to tackle the problem of existing interest only mortgages.
Following years of inaction, lenders have now been ordered by the FCAto contact their customers who might be at risk of defaulting on their home loans. It is estimated that around half of interest only borrowers will struggle to pay back their mortgages in full when due in the years up to 2020; that amounts to around 300,000 home owners affected by this problem.
Before the credit crunch many thousands of borrowers had interest only loans approved and were happy to take them out because they offeredlower monthly repayments than a regular repayment (capital and interest) mortgage, and they also gave high value mortgage borrowers a measure of flexibility in deciding how they could repay their debt. For high net worth individuals their debt repayment would typically have been planned through the sale of other assets, with anticipated bonuses or via an inheritance.
However, many ordinary borrowers were relying on house prices to keep rising at the same rate as they had done historicallyand expected significant equity gains on their home to enable them to sell their home in the future and use the profit to pay off the home loan and buy a smaller property with the remaining proceeds.

Clearly for most home owners during the economic downturnhouse priceshave stagnated, at best, or, at worst, have actually fallen. This means that many thousands of home owners aretrapped in a position where they simply don’t have the means to repay their mortgages when they fall due.
Banks and building societies are now being obliged to contact their interest only borrowers and offer information to help them find a method to repay the debt. The problem is greatest for those who will soon come to the end of their mortgage termbecause,with only a few years left, the option of switching to a repayment mortgage would mean excessively high monthly repayments that many borrowers simply could not afford.
If you still have a good number of years left on your mortgage it is not too late to make alternative plans to sort out the problem. If you can afford to switch to a repayment mortgage then do so as soon as possible and start gradually paying down the capitalbut expect to see a huge jump in your monthly repayment amount.

By John Moore

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