Interest Only Mortgages: A Fuse Waiting to be Lit
Many of us dream to get on the property ladder, since the dawn of land, man, and women, have wanted to be land owners.
For some innate reason, we want to have our own place, piece of land, a property to call our own.
However, property is not cheap. The old joke as to why property is so expensive goes, “because they are not making any more of it”.
But there is truth in jest.
Buying property is not cheap, and usually involves saving for a deposit, getting a mortgage, and then affording the mortgage.
Banks and mortgage lenders know and feel our pain, that is why they try to come up with new mortgage products to allow us to be able to buy and afford a house/property.
If we feel saving for a deposit is too difficult, based on our earnings and cost of living, mortgage lenders and banks think of ways for us to buy a property and get a mortgage, with a low or no deposit.
If bad credit is holding us back from getting a mortgage, then the mortgage lenders create some bad credit loan to help those with low credit scores get a loan.
If affordability is the problem, then the mortgage lenders will try to find a way to reduce the monthly payments, so they can be more affordable.
The only way to reduce monthly payments, except reducing the amount borrowed, is by reducing the interest charged, and/or increasing the term.
Increasing the term is a good idea, take a loan out for 15 years instead of 10 years, and the payments go down.
Take out a loan for 20 years and the payments go down even further. However, as a borrower, the longer the term, even with a low interest rate, the more you pay in interest, because you are paying so long on the loan.
Then the lenders got together and came up with a brilliant idea of interest only mortgages. Just pay the interest on the loan for a period of time. The property is expected to appreciate, grow in value, and then after a set period, you can remortgage to a new loan, maybe one with a fixed rate, or tracker rate.
In theory, it all sounds so good. On paper, it seemed to work. In reality, it may be the fuse to the “debt time bomb” we have been hearing about.
Interest Only But Only For a Period of Time
There is a lot in the news, and growing concern over interest only mortgages, and if and when they may blow.
As the Bank of England debates interest rate changes, and increases, as a home owner with an interest only mortgage, you should be concerned.
If rates go up, so could your mortgage payment.
If properties don’t appreciate or go up, many home owners see no reason to continue making payments, and walk away from their property.
The dream has been shattered and turned into a nightmare.
The fact is that if you have an interest only mortgage, yes it helps you get into the property and afford the payments. But this interest only period is only for a short while, maybe five (5) years.
After that time you are expected to sell the property to pay off the loan, you keeping any profits, or remortgaging to a new loan to keep the property.
Sounds easy. Remember, it looked good on paper.
The reality is much harsher.
It is believed that there are 1.67 million people in the UK with interest only mortgages. This represents over 17.5% of all mortgages in the UK.
If these start to fail and fall, it is not just a bomb, but a nuclear blast!
The FCA/Financial Conduct Authority’s Jonathan Davidson said, “Since 2013 good progress has been made in reducing the number of people with interest-only mortgages.”
“However, we are very concerned that a significant number of interest-only customers may not be able to repay the capital at the end of the mortgage and be at risk of losing their homes.”
“We know that many customers remain reluctant to contact their lender to discuss their interest-only mortgage for a variety of reasons.”
‘We are very clear that people should talk to their lender as early as possible as this will give them more options when it comes to the next steps they can take.“
For many people, this is a very real possibility, and they need to act now, and speak to their mortgage lender to inquire what options may be available.
Unfortunately in some instances, the cure comes too late. If enough properties are repossessed or lost through interest only mortgages and poor appreciation, then the banks and lenders may be forced to acknowledge the problem.
But only after the fuse has been lit.