The Financial Conduct Authority (the successor of the Financial Services Authority) has today issued a stark warning to interest only mortgage borrowers in the UK. A recent survey shows that around 2.6 homes in the UK have been financed using interest only mortgage arrangements and are due for repayment over the next 30 years. There is a growing concern that the various savings options which have been used in the past will still leave many people short when the final capital repayment is due.
Indeed, while many people who have plans in place to repay their initial mortgage loan will struggle, it seems that around 10% of those with interest only mortgages due for repayment over the next 30 years have no repayment plans in place.
What is an interest only mortgage?
An interest only mortgage is a mortgage arrangement whereby you only pay off the monthly interest on the original mortgage loan and the original mortgage is repaid at the end of the mortgage term. Many people saw these as a cheap way to gain access to the UK property sector which in years gone by has proven to be very lucrative for many people. However, for those without a long-term repayment plan in place for their original mortgage this could prove to be a very difficult situation.
Why will there be a shortfall in mortgage repayments?
There are a number of reasons why the Financial Conduct Authority has released this statement today, and in many ways it is a warning shot for those effects. Indeed, those with interest only mortgages due for repayment over the next 10 years will receive correspondence from their mortgage provider over the next 12 months making them aware of the impending loan repayment and prompting them to consider repayment plans.
Quote from PropertyCommunity.com : “The numbers of first time buyers are increasing, although still well below levels at the market peak in 2006, according to research from UK lender Lloyds TSB.”
There are many people in the UK who climbed aboard the property ladder with the idea that they would use the increase in property prices as a means of partially funding their long-term mortgage repayment. Indeed many people also took out an array of savings plans, ISAs and endowments although some of these particular arrangements have left many with shortfalls due to the reduced return on investment in areas such as the stock market, etc.
Is there a need to panic?
The survey conducted on behalf of the Financial Conduct Authority found that 37% of those questioned are aware of a potential shortfall based on their own calculations but rather alarmingly, 10% (equating to 260,000 individual mortgages) of those questioned have no repayment strategy in place. The severity of the situation will obviously vary from individual to individual but if you have an interest only mortgage then it is vital that you should consider professional financial advice to ensure that your situation is manageable.
There is no point in burying your head in the sand and automatically assuming that any future windfall, inheritance, savings or indeed improvement in property prices will bail you out. In some of the worst cases mentioned by the Financial Conduct Authority certain individuals appear at this moment in time to be tens of thousands of pounds short of their required mortgage repayment.
Could we be on the verge of another mis-selling scandal?
Interestingly, the Financial Conduct Authority also breached the subject of mis-selling with regards to interest only mortgages only to find that the vast majority of arrangements appear perfectly legal and above board. The fact is that interest only mortgages were very popular at a time when property prices were rising, the economy was growing and indeed the stock market was creating long-term returns which could fund savings plans, collective investments and stock returns.
Whether or not individuals were carried along on this wave of hope that property prices would rise indefinitely, the stock market would create a constant stream of annual returns to fund mortgage repayments and indeed the economy would continue to expand forever and a day, is debatable. However, it does seem at this moment in time that there are no concerns with regards to the potential mis-selling of interest only mortgages in years gone by.
As part of your long-term financial strategy, you should review your finances on a regular basis. Whether this is monthly, half yearly or annually, you need to take into consideration your overall financial position, your liabilities, your assets and funding/savings plans in place for the future. It is not always easy to plan for the long-term but if there are any major changes in your financial situation then these should be flagged when you review your finances.
Whether or not you should involve a professional financial adviser at every stage of your review is a personal choice but the fact is that professional financial advice should be taken at some stage to ensure that you are in a position to cover your future liabilities as well as your current liabilities.