Belfast Telegraph

Saturday 23 August 2014

Warning for interest-only borrowers

A report warns that many homeowners on interest-only mortgages may not have enough money to pay back their loans

Homeowners on interest-only mortgages are facing a "wake-up call" after the regulator warned that up to half of these borrowers will not have enough money to pay their loans back.

The Financial Conduct Authority (FCA) fears that consumers are under-estimating the scale of the problem, with around 260,000 people thought to have no strategy in place for repaying their loan.

Consumer campaigners also raised concerns that a "significant" number of people claimed to be unaware how their loan was meant to be paid back when they took the product out and called for further work to make sure some borrowers were not mis-sold deals.

Mortgage lenders have agreed to alert their most at-risk customers to help them avoid "payment shocks". Some of them could end up having to sell their home to pay the loan back if they do not take stronger control of their repayment planning.

Around 2.6 million interest-only mortgages are due for repayment over the next 30 years but research has revealed that one in 10 people on such a deal have no plan for paying the money back.

The report said it was not clear how well some borrowers understood the discussions about how the mortgage was meant to be repaid when they took the deal out.

Some 13% of interest-only borrowers said they were not aware when they took out the deal that they needed a plan in place to repay the whole amount borrowed, not just the interest - and a further 6% were unsure.

However, those who said they were unaware of the need for a repayment strategy were more likely to have taken out the deal longer ago and just one in 40 people (2.5%) who said they were unaware still has no repayment plan in place.

Richard Lloyd, executive director of consumer group Which?, said: "We're worried that a significant proportion of consumers say they did not know they needed a separate repayment plan on their interest-only mortgage.

"We hope the FCA looks into this further to establish whether lenders made it completely clear to interest-only borrowers that they would need a repayment plan, to be sure that there wasn't widespread mis-selling."

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