FCA warns of interest-only time bomb

More than one million interest-only mortgage holders are facing a repayment shortfall once their loan matures, according to the Financial Conduct Authority.

The number of interest-only mortgage holders is currently around 2.6 million and the Financial Conduct Authority (FCA) has warned that nearly half of those will have insufficient funds to cover the amount owed once the mortgage. This means that more than 1 million homeowners are facing a shortfall once their loan matures.

Interest-only mortgages work by only charging the mortgage holder interest on the amount owed. The outstanding loan is then due for repayment once the loan matures, usually 25 years after the mortgage is taken out. An interest-only mortgage is designed to be repaid through savings, inheritance, the sale of the property, or alternate means once the term of the mortgage is over.

The FCA estimates that the average shortfall will be in the region of £71,000 and suggests that the reduction in property prices has been a large contributing factor for the deficit. This means that whereas the sale of the property may have previously been enough to pay for the loan, the crash of the market has negatively impacted upon any projected returns.

The figures come from a study conducted for the FCA that questioned 1,103 interest-only mortgage holders on how then intended to repay, from their findings, the FCA suggest that 48% of participants will face a shortfall when the time comes to repay the loan. Furthermore, one in ten policyholders, which equates to 260,000 people, have no repayment strategy.

This potential time bomb has caused the FCA to outline new rules to tighten up the regulations surrounding the sale of interest-only mortgages which will come into force in April 2014.

The FCA has also received an agreement from mortgage lenders to write to their customers reminding them of the importance of preparing a repayment strategy.

Paul Smee, director general of the Council of Mortgage Lenders said;

"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.

“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."