It seems that the issue of the so-called “UK mortgage timebomb” comes around on a regular basis and after a survey by the Citizens Advice Bureau it is again headline news. While on the surface the potential damage to the UK property market is concerning, it is worth noting that the vast majority of those who may struggle will already own a property which is significantly greater in value than their mortgage capital debt.
Are things as bad as many predict?
It is estimated that there are 3.3 million people in the UK who have an interest only mortgage which effectively means they need to make their own arrangements to pay off the capital at the end of the agreement. There are a number of ways to save and pay off the capital including endowments, although these have delivered substandard returns of late, and traditional tax efficient savings plans. Of the 3.3 million people in the UK who have an interest only mortgage it is believed that nearly one million have no arrangement to pay off their mortgage capital at the end of the term.
Is refinancing an option?
Even for those who have interest only mortgages and have made no arrangements to pay off their mortgage capital debt there are a number of options. Depending upon the age of the customer, there is the potential to re-mortgage their property to cover the amount owed. In many cases this should still leave significant equity within their property although they will obviously need to have the means to cover the new mortgage arrangement. Indeed, mortgage companies are now legally obliged to ensure they offer the best deal for their underlying customers which in these circumstances may be a capital and interest repayment mortgage.
Those who are struggling to arrange a re-mortgage, whether this is because of their employment situation or their age, may well consider downsizing. In some circumstances, depending upon the potential capital gain, some people could downsize and effectively pay off their debt and pay for their new property “in cash” leaving them debt free. For many homeowners this would be the perfect scenario, the mortgage paid off and a property on which they have no debt.
When should you take advice?
If there is a chance that you may not be in a position to pay back your mortgage capital at the end of an interest only arrangement you should take advice as soon as possible. As we touched on above there are a number of ways in which you can cover the mortgage capital debt but the final decision will be based upon your individual circumstances. Official figures show that of the 85,000 interest only mortgages which expire every year nearly 50% involve those over 65. Forecasters believe that the peak of the so-called “UK mortgage timebomb” will hit in two years with a suggestion that many homes could be repossessed.
The key to avoiding such difficult situations is to take action as soon as possible, when you can foresee a potential problem, and take professional advice. While there may be some difficult decisions ahead the fact is that many people coming to the end of a 25 year interest only mortgage will likely have seen significant growth in the value of their property. Perhaps things are not quite as bad as some of the pessimists would have you believe?