Interest Only Mortgages – the next PPI ?

Written by Sam Jones on 03 October 2012.

An investigation is currently underway by the Financial Services Consumer Panel (FSCP) and is looking into whether interest only mortgages have been mis-sold. Following guidance from the FCA, many lenders have tightened criteria around interest only and mortgage holders now require some form of vehicle at the end of the mortgage term in order to repay the original loan.

It is claimed that many people are left in a trap at the end of their term as they have little means to pay off the capital and this may be causing some to sell their home, in order to pay back the bank.

Mike Daily, who sits on the Consumer Panel, has indicated that the FSCP are under the impression that many mortgages may have been offered to customers without ensuring appropriate checks were undertaken. The concern is that a number of mortgages not due to complete until 2020 to 2025, may be on interest only with no prospect of those holding them, having the capital to pay them off, at the end of the term. It is clear that whilst an appropriate vehicle needs to be in place, the type of vehicle, be it ISA’s investments, pensions, endowments or even sale of the property to downsize, is questionable and needs to be based on plausibility, suitability given the individual applicant’s circumstances.

It is clear that from 1970 onwards, interest only loans were very popular given they looked cheap in contrast to repayment deals. Generally, people looked to pay of these mortgages from endowments, a type of investment and savings plan linked to the performance of the stock market. In 1992 over 75% of mortgages were interest-only.

As the popularity of endowments declined after 2000 a worrying trend began of homebuyers emerged and that is those who took out interest only but with no vehicle to repay the capital. This appeared less of a problem as house prices soared but is more of a problem whilst growth has stagnated.

The Financial Conduct Authority (FCA), the City watchdog has warned 1.3million borrowers may face a ‘ticking time bomb’ —as they have no plans or no way to repay the loan. The concern is that FCA data suggests there may be 320,000 interest-only mortgage holders who have missed a mortgage payment and therefore affordability to invest in some form of repayment vehicle, is very much in question. This has caused many to predict interest only mortgages, could be the next PP! financial scandal.

It is clear that over 2.5million households will see these mortgages mature after 2020. Estimates put the average debt at £155,000 to pay off and many of those holding these mortgages have little savings put aside to redeem the loan. This will likely result in them having to sell the property and either downsize or move into rented accommodation.

The concern is that many of those who actually started putting money aside may have stopped given the credit crunch and financial austerity measures, with money set aside now going on school fees, childcare and other daily living costs. 

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