Concern over interest-only mortgages increases....
This week the FSA announced that a staggering £120bn worth of mortgage repayments are due within the next 10 years for those on interest only mortgages.
- "Interest-only mortgages, under which the principal sum borrowed only becomes payable in full at the end of the term, were popular in the last property boom as lenders became less strict about the repayment strategies accepted."
The days of the 'interest-only mortgage' appear to have fallen by the wayside. Historically mortgage lenders would lend you the money and only require you to payback the interest of the loan each month. The idea was that the borrower would simultaneously be stashing money away left, right and centre into some sort of high interest savings account, endowment or stocks.
- Since then the bubble has of course burst and many borrowers now find themselves near the end of their mortgage period, with very little savings and the worrying prospect that they can neither repay the oustanding mortgage balance, nor remortgage.
- In addition to this interest rates are set to increase, after remaining at the historic low of 0.5% for the last three years. Earlier this week a number of different mortgage companies issued rate rises, which will only add to the difficulty of those who are already struggling with their interest-only mortgages.
- There are outstanding fears that current interest-only mortgage holders simply haven't saved enough and that the majority of house purchases using this system will have been built upon un-repayable debt, which will in turn lead to a further financial crisis down the road when those debts cannot be repayed.
- Unlike standard mortgage where buyers use a mixture of deposits and mortgage repayment calculators to work out exactly how much they can afford and exactly how much they can borrow, interest-only mortgages only asked lenders to repay the interest, rather than make any actual repayments.
- In response to this the FSA are now suggesting that banks tighten up on their interest-only mortgages by ensuring that borrowers have active safeguards. This will mean that borrowers will have to prove annually that they are continuing to look after their financial obligations. Most banks are suggesting that consumers looking for an interest-only mortgage will have to have some sort of ISA/savings account/endowment policy for at least a year before even thinking about applying for an interest-only mortgage. Other banks are also implementing annual checks on these policies to ensure that they are safe and keeping up with initial projections.
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