BBC News

Shortfall fears for interest-only mortgage holders

By Kevin Peachey
Personal finance reporter, BBC News

media captionMartin Wheatley, from the FCA: "Banks don't want to write off bad debt - they don't really want to kick people out of homes"

More than a million people with interest-only mortgages face a financial crunch when they have to pay them off, a watchdog is warning.

Some 2.6 million UK householders have the mortgages but the Financial Conduct Authority said estimates suggested that nearly half would not have savings or other funds to cover the final bill.

The average shortfall is £71,000, according to FCA research.

Lenders will now step up warnings to homeowners to prevent payment shocks.

Mortgage timebomb

Homeowners with these types of mortgage - about a third of all UK mortgage holders - make repayments each month that just cover the interest on the amount borrowed.

The full amount of the home loan should be paid back when the mortgage term matures - usually after 25 years - using funds such as savings, inheritance or from the sale of a business.

These mortgages were popular when sold alongside an endowment policy in the 1990s, and again during the last decade when many homeowners banked on the rising value of their home to cover the cost.

media captionHomeowner Robert McGregor: "It's a burden... knowing that I will never pay off the loan"

This led to fears of a mortgage timebomb, which prompted the agreement of new rules to tighten up on the sale of these mortgages from April 2014.


The FCA, the successor of the Financial Services Authority as the sector's watchdog, commissioned research to give a clear indication of what borrowers face when mortgages mature between now and 2041.

Market research firm GfK NOP questioned 1,103 interest-only borrowers to consider how prepared they were to repay their loans.

It also created a balance sheet for each respondent, looking at their financial position now and at the time their mortgage matures

It found that 37% of interest-only mortgage holders said they faced a shortfall in their plans to pay back the lump sum of the home loan, based on their own sums.

This included people like Rob McGregor who said that taking out such a mortgage seemed a good idea at the time, but was now something he regretted.

"It is a pressure. It can be quite upsetting sometimes when you look at your finances and think I have this huge debt hanging over me all the time," the 42-year-old said.

While many people realise they might have a problem paying back the home loan when the time comes, others are more oblivious of the issue.

The FCA says estimates "suggest" many people underestimated the financial problem and it believes 48% of holders of such mortgages face a shortfall.

This could mean some are not likely to receive all the savings income or inheritance that they might expect.

More critically, one in 10 - the equivalent of 260,000 people - have no repayment strategy in place at all. They face the prospect of having to sell their homes when their mortgage matures.

'Help available'

The watchdog said that those facing a shortfall, even if their final bill is looming within the next 10 years, should be able to find a viable way to pay the home loan back.

Martin Wheatley, chief executive of the FCA, told the BBC that many of the mortgages were taken out before the financial crash, "when there was a lot of optimism about rising house prices and wages".

He said that there was no evidence people misunderstood the sort of mortgage liabilities they were taking on. "It's just that people were optimistic about the future," he said. "My advice to borrowers is not to bury their head in the sand. This report is a call to action."

Mortgage lenders have agreed to write to borrowers to ensure they have a repayment strategy in place, concentrating on those whose policies mature first.

"Anyone with an interest-only mortgage maturing before the end of 2020 should expect to be contacted over the course of the next 12 months by their lender," said Paul Smee, director general of the Council of Mortgage Lenders.

"The aim is not to force customers to take actions they do not wish to, but to ensure they are aware of their mortgage repayment position, and have an opportunity to take steps that may prove useful to them in avoiding unforeseen payment shocks later."

Paul Broadhead, of the Building Societies Association (BSA), said that this type of mortgage had worked well for many people, but help was available for those who found themselves in trouble.

"Building societies and other mutual lenders will deploy all the tools they have to help anyone who has an interest-only mortgage with a shortfall. This will only work if people respond to the communications they receive and engage early with their lender," he said.

But the consumer group Which? said that it was vital that people trapped in their current mortgage deals were treated fairly by their lenders.